New Borrowing, minus Interest Paid (adjusted for inflation)

... changes in borrowing behavior have played a smaller role in the growth of household leverage than is widely believed. Rather, most of the increase can be explained in terms of “Fisher dynamics” — the mechanical result of higher interest rates and lower inflation after 1980.

JW Mason

The year-to-year change in household debt is a measure of the money households borrow into existence and spend into circulation. An increase in household debt is an injection of funds into the money used as a medium of exchange.

But, to state the obvious, an addition to debt adds to debt. And debt must be repaid with interest. Interest is a cost that takes money and moves it from the productive sector to the financial sector. While it remains in the financial sector, the money is not used as a medium of exchange -- not, at least, in the productive sector.

So we can say that an addition to debt increases the money available for spending, and interest payments reduce the money available for spending. If we take one year's addition to debt and subtract from it the payment of interest for that same year, we can calculate a "net change" in money available for spending due to household credit use. Figure it for a number of years, and we can make a graph showing the history of the net change over time.

But the values on such a graph will be influenced by the rate of inflation. The graph will be malformed because the rate of inflation varies. As we are thinking about growth, we must remove the inflation. We can remove it by the same calculation used to remove inflation from "nominal" GDP.

However, I want to use the CPI as the measure of inflation, rather than the Deflator, because we're looking at household debt and household interest costs.

All of this can be done at FRED with a minimum of fuss:

Graph #1: Net Change in the Medium of Exchange due to Household Debt

The description of the calculation (in the upper blue border of the graph) has been cut short by a devious and disappointing FRED. The full description is "(Households and Nonprofit Organizations; Credit Market Instruments; Liability, Level-Monetary interest paid: Households and nonprofit institutions)*(100/Consumer Price Index for All Urban Consumers: All Items)"

The plotted line shows the increase in debt, minus interest paid. The difference has been adjusted for inflation. Where the line is above zero, borrowing is greater than interest cost. Where the line is below zero, borrowing is less than interest cost.

Before 1980, the line is mostly above zero, indicating a net increase in the circulating medium, a boost for spending and growth.

Between 1980 and 2000 the line is mostly below zero, indicating a net decline in the circulating medium due to the cost of interest.

The graph supports JW Mason's statement.