Tuesday, January 22, 2013

Maybe that's why there was a crisis

In total, we have some 50 trillion dollars of debt in this country. That's a lot.

I don't know what the average interest rate is on all that debt, but say it's 2 percent. That's pretty low.

Two percent of fifty trillion is a trillion dollars. That's a lowball estimate of how much we pay in interest each year on all our debt. A trillion bucks.

Forget about the debt. Just look at the interest. We make the payments out of our income. Income is circulating money. If you save a bit, the bit you save stops circulating. As you spend the rest, it remains in circulation.

The money we use to pay that trillion dollars of interest comes out of the money in circulation.

How much money is there, in circulation?

Today there is about 2.4 trillion dollars circulating. So over the course of a year, we take almost half of that out of circulation just to pay interest.

Before the crisis there was about 1.4 trillion dollars circulating. It took almost all of that money just to pay interest on the debt we owe.

Maybe that's why there was a crisis.

Oh, I know. I've simplified things.

You want to tell me about all the poor old folks who live on interest, that can't afford to eat now because interest rates are low. And you might remind me that for people living on their interest income, the money most certainly does come out of savings and does go back into circulation.

Sure. But poor folks don't have a lot of money, in savings or anywhere. So I don't expect that the part of interest payments that goes back into circulation is a very large part of the total. I expect it is a very small part.

Rich people, on the other hand, might have a lot of money. But their Marginal Propensity to Consume is less, and they can afford to save. So for the people that have money, most of what they receive in interest is not coming back into circulation.

Anybody got the stats?


Greg said...

Very nice analysis Art

Think about it this way too. A trillion in interest would be 1000 per billion people. Well we only have a third of a billion so that 3000 PER PERSON !! A household of four is paying 12,000 or $1000/month in interest!

It gets worse.

How many households are paying no interest because
A) they have no debt or income B) They have no debt because of very high incomes.

The rest of us are paying all the interest.

The Arthurian said...

Too bad Krugman can't see it, huh?

Greg said...

Now this debt level also includes non household debt I imagine but non household debt is still serviced by households via the price of products.

Households pay for everything. Im not lamenting that fact since households include everyone eventually but the distribution amongst households is important.

The Arthurian said...

"Households pay for everything. Im not lamenting that fact..."

Yeah, that's our role as consumers. That's fine. But still, policy must be sure our end of the deal keeps up with the productive side, or things get all out of whack!

"...non household debt is still serviced by households via the price of products."

Excellent, excellent point.

Greg said...

Thats what has always gotten me about the supply siders who argue that raising taxes on the job creators gets passed on to consumers. Every cost a job creator faces is paid for by consumers. Who else IS THERE to pay? Customers fund everything. Bonuses, capital improvements, taxes, salaries. All that is paid from revenue eventually and revenue is from sales and sales is from.................CUSTOMERS!!