Saturday, February 25, 2012

FCM: The Factor Cost of Money -- Further Review

Turns out, the info I needed to figure the Factor Cost of Money is right there in FRED.

A quick search turned up four data series on the Federal debt:

GFDEBTN$14B+MillionsFederal Government Debt: Total Public Debt
FYGFD$14B+BillionsGross Federal Debt
FYGFDPUN$10B+MillionsFederal Debt Held by the Public
FGTCMDODNS$10B+BillionsTotal Credit Market Debt Owed by Domestic Nonfinancial Sectors - Federal Government

The $4 billion difference between the first two series and the last two is the $4 billion of the Federal debt held internally by parts of the Federal government such as the Social Security Administration.

The two series that end up something over $14B look similar to each other on the graph. And the two that end up in the neighborhood of $10B look similar to each other.

Graph #1: The Federal Debt, four ways from sunday

One of the two series that passes $14B is given in Millions, and the other in Billions. Same is true for the two series that end up near $10B. I want to use the debt number as a denominator under the interest number, interest paid by the Federal government. And the interest number is given in Millions, so I will use the two debt series that use Millions, and ignore the two that use Billions.

Graph #2: Federal Outlays for Interest relative to the Two Measures of Debt
Graph #2 shows FRED's FYOINT ("Federal Outlays: Interest") as a percent of the Federal debt, for both the $10B version and the $14B version of the Federal debt.The red line shows the average interest rate the government pays, based on the smaller debt number. The blue line shows the average interest rate the government pays, based on the bigger debt number.

I'm assuming that the blue line is the accurate one... In other words, I'm assuming that "Federal Outlays: Interest" includes outlays for interest paid to the Social Security Administration and the other government agencies holding parts of the Federal debt. The government don't get to NOT pay the interest, just because of who holds the debt. I think.

The lower line on Graph #2, the blue line, shows the same peak as the vertical bar graph I showed a few days back, a peak around 7½% in the early 1980s:

Graph #3: The Proxy Average Interest Rate (PAIR)

So the interest rate I have figured is a lowball estimate.

Also, Federal debt has always been considered less "risky" than anybody else's debt, so the Federal government has typically paid lower interest rates than anybody else. So again, when I use that rate to estimate the total interest cost of the private sector, that number is a lowball estimate.

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