Tuesday, September 27, 2011

Nobody Looks at the Macro

From yesterday, this one:

Graph #1: Since 1992 the trend is horizontal

Here are four different interest rates, all quite similar:

Graph #2

Here (from Graph #2) is FRED's "3-Month Treasury Bill: Secondary Market Rate" -- very similar to the Federal Funds rate, but it goes back to the 1930s -- together with Net Interest from Graph #1. Both series use annual numbers:

Graph #3
Why does interest cost rise more slowly than interest rate, up to the peak? Dunno. Maybe the question is irrelevant. It's just a graph. But what I would like to say, what I can't argue yet, is net interest income understates interest cost.

Graph #4: With each series on its own vertical axis,
interest cost does not rise more slowly than the interest rate.
But it does fall more slowly.

Why does interest cost trend horizontal rather than falling with interest rates? This, I know the answer to: As time goes by, more and more of our spending makes use of credit. More and more credit-use is embedded in the average transaction as time goes by.

If interest rates fall by half while embedded credit-use doubles, there is no decline of interest cost. But nobody thinks of it that way.

I've been looking a little at a speech by Ben Bernanke, from June 15, 2007: The Financial Accelerator and the Credit Channel. In the conclusion of the speech, Bernanke says:

I have taken you on a whirlwind tour of several decades of research on how variations in the financial condition of borrowers, whether arising from changes in monetary policy or from other forces, can affect short-term economic dynamics. The critical idea is that the cost of funds to borrowers depends inversely on their creditworthiness, as measured by indicators such as net worth and liquidity.

"The cost of funds to borrowers depends inversely on their creditworthiness..." Everybody looks at the individual borrower. Everybody looks at the micro. Even Ben Bernanke. Even when his topic is macro.

Nobody looks at the reliance on credit, overall in the economy. Nobody looks at the macro.


The Arthurian said...

From the post:

But what I would like to say, what I can't argue yet, is net interest income understates interest cost.

From my 12 page PDF:

"Since 1990, Ford has made more money from financial services, principally automobile loans to consumers and dealers, than from car- and truck-making operations."

And from the associated footnote:

From "In Record Turnaround, Ford Had $2.5 Billion Profit in 1993," by James Bennet in The New YorkTimes, February 10, 1994. And again: "Ford Motor Company has earned more as a banker than as a car builder in five of the last six years." From "Financial Powerhouse Takes Aim at Bad Credit Risks,: by Robyn Meredith in The New York Times, December 15, 1996.

Net interest income understates interest cost.

Jazzbumpa said...

Net interest income understates interest cost.

This is an interesting idea, but you're not there yet. It's a mathematical statement, and you'll never get there with anecdotal evidence.

Your thesis is IC > NII.

The only way to validate it is with actual numbers.

Good luck!

Jazzbumpa said...

My first thought is that interest income must = interest cost. It's an accounting identity.

But some interest cost goes overseas, so you have to watch how you define your systems.

Total Interest cost > national interest income.

On a different note, considering ability to pay, interest burden > greater than interest cost.


Clonal said...


remember my prime rate vs nominal gdp growth rate curves? Remember that before 1980, the prime rate was lower than nominal gdp growth rate. After 1980, the prime rate was greater than the average gdp growth rate.

That explains your curves right there. Since 1980, the banks have been like a vampire, sucking more blood from its victim than the victim can replenish.

The Arthurian said...

Clonal, I had to think about it three times your way but then yes, your explanation certainly fits. But it doesn't satisfy me when I look at it my way. Not yet anyhow...

Jazz, that Ford stuff reminded me that there is more involved than just net interest. There is a whole industry. If demand for credit fell by half (say) and the size of the finance industry fell by half, there would be a lot more numbers changing than just net interest.

Sometimes these posts are just unfinished thoughts, he wro...

Jazzbumpa said...

That's why I try to help you fin . . .


Jazzbumpa said...

Art -

You should find this very interesting, i particular the Bruce Wilder comment @15, I think.



Jazzbumpa said...

This, too.



The Arthurian said...

Clonal, I figured out what bothers me about your interest rate, growth rate comparison. The interest rate is important, definitely. But I am trying to look at how many times the interest rate is applied. The more we use credit for money, the more the interest rate is applied, and the more costly it is to use credit, at any given rate of interest.