Sunday, January 21, 2018

Interest Cost by Sector

The first graph shows the distribution of interest costs among sectors of the economy.

I want to point out that it's a stacked graph. That means, for example, that the purple sits above the blue, not behind it. And the visible green (the very thin strip located between purple and red) is all there is of the green.

Working from the bottom up: blue shows all government (Federal, state and local) interest cost; purple shows household interest cost; green shows nonprofit institutions; and red shows domestic US business. The unused area above the red shows "other" sectors. Adding that in brings the total up to 100%, all interest paid.

Graph #1: Shares of Total Interest Paid, by Sector
In 1960, where the graph starts, total government share of interest cost (blue) is 22.6%. The household share runs from there up to a little over 50%, so about 30% of the total. The share paid by nonprofit institutions (green) is essentially zero. The share paid by domestic business runs from a little over 50% to a little below 100%, so almost 50% of the total. And "other" starts out in 1960 at around 2% of the total.

FRED calls it "monetary" interest paid in order to distinguish it from "imputed" interest.

At a glance, the dividing lines between sectors run fairly flat. This means that each sector's share of the total is roughly constant. By no means perfectly constant, but roughly. When you think of government debt, you picture it going up, up and insanely up, but you don't see that on this graph.

You don't see government sector interest cost going up up up on this graph, because all the sectors had debt and interest going up up and up. So the shares are roughly constant.

In other words, it is not the debt and interest cost of government that created our economic problems. Nor is it the debt and interest cost of households or nonprofits or domestic businesses (or "other") that created those problems. Rather, it is debt and interest cost in the economy as a whole, rising to too high a level, which created our economic problems.

The second graph shows the interest paid by the same four sectors (omitting "other"), but this time each sector's share is shown as a percent of GDP. Since the 1960s, perhaps earlier, financial cost increases until it makes recession inevitable, then falls for a time, and then increases until it makes the next recession inevitable:

Graph #2: Interest Paid by Sector, as Percent of GDP
Blue is total government, purple is households, and red is domestic US business.

Old Rubber Stamp font by Rebecca Simpson.

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