How does it look when we compare

**money added to the economy by increases in credit market debt**

**money drained out of the economy as interest payments**

Money added relative to money drained:

Graph #1: Annual Change in Total Debt, relative to Annual Interest Payments |

A horizontal line at 1.0 would mean our new borrowing is equal to the amount we turn over to finance as interest payments every year. No effect on the money supply. Above 1.0 would mean we are borrowing more than we are paying as interest (increasing the money supply). And below 1.0 would mean we are borrowing less than we are paying as interest (decreasing the money supply).

What I want to see with this graph is how much of a boost borrowing gives the economy, and how much is only a boost to the financial sector. The graph is not a perfect indicator, because some portion of interest paid is withdrawn by the recipients and spent back into the economy. I don't know how much of it is withdrawn and spent, but it has to be somewhere between the zero line and the blue line.

Total debt is a "stock" but the change in total debt is a "flow". Interest paid is also a flow. The flow-to-flow ratio is ... dunno, a ratio, I guess, as "billions per year" cancels "billions per year". Whatever. I want to look at the accumulation of differences over the years.

By "accumulation of differences" I mean the number shown on the graph, minus 1, and the sum of those values over time. Why "minus 1"? Because the graph shows the change in debt

*per dollar*of interest paid. I want to subtract the dollar of interest. If the blue line is at 1.1, it means we borrowed $1.10 for every dollar of interest paid. I subtract the dollar of interest paid to see how much economic boost we got from the borrowing: ten cents.

But if the blue line is at 0.8, it means that for every dollar of interest paid, we borrowed 80 cents. Subtract the dollar, and it turns out we're 20 cents short. The net effect of these financial changes was to create a drag on economic activity, rather than a boost.

(These examples assume that no money is ever spent out of savings, which is unrealistic. But the graph gives us a feel for what's happening, and a way to think about it.)

I determine the amount of boost or drag by subtracting the interest number from the change-in-debt number. Then I add up the results to see the cumulative boost or drag. It's an interesting detail, an interesting indicator.

I took the FRED data from Graph #1 and did the subtraction and accumulation in Excel.

Graph #2: At 100% accumulation of Interest Received |

By the last year shown (2015), at 100% accumulation, the accumulated reduction of circulating money comes to ten dollars for every dollar of interest paid. I think that's an unrealistic number. I think it must be true that less than 100% of interest received is retained as savings, and that some portion of interest received is spent back into circulation.

Here is how the graph looks with a 50% accumulation rate:

Graph #3 |

If we cut the rate of accumulation in half again, the shape of the line remains unchanged:

Graph #4 |

Graph #5 |

On this graph, the accumulated reduction of circulating money as of 2015 comes to about a dollar for every dollar of interest paid. Just a gut feel, that number is unrealistically low.

## 2 comments:

Hi Art,

That's an interesting calculation that you are making.

However, on graphs #3,#4 and #5 it looks like all you are doing is scaling the entire graph by .50, .25 and .10. In other words, scaling both the accumulation of debt and interest paid. If you want to see what 50% of the interest compares to the total increase in debt, you need to multiply the interest by .5 (or whatever) before calculating the ratio.

My guess is that at about 80% of the interest retained in savings (20% spent) it would balance. For anything less than 80% the accumulation would end up above zero. It would be interesting to know how much income tax is paid on that "monetary interest paid"

For just the household portion of debt increase to interest paid it looks like it might be about 90% of interest would balance out to zero.

This graph shows where I think they would balance to zero.

https://fred.stlouisfed.org/graph/?g=dm1w

But consider: for it to be possible for any entity in the economy to save $1 and collect interest on that saving, there must be some other entity willing to borrow an additional $1 and pay the interest.

"But consider: for it to be possible for any entity in the economy to save $1 and collect interest on that saving, there must be some other entity willing to borrow an additional $1 and pay the interest."

I know. It is amazing the economic system works at all. And every time lawmakers do something to enhance or facilitate borrowing, or to enhance or facilitate saving, they make the situation worse. Peak credit occurred in 2008, but peak credit benefit occurred about 50 years earlier.

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