Sunday, February 26, 2012

FCM: PAIR and the FedFunds Rate

I took Graph #2 from yesterday's post and renumbered it:

Graph #1: Federal Outlays for Interest relative to the Two Measures of Debt

The graph shows FRED's FYOINT ("Federal Outlays: Interest") as a percent of the Federal debt, for both the $10B and $14B version of the Federal debt. I'm considering the lower set of numbers as the "average" interest rate paid by the Federal government on its gross debt.

I'm in the early stages of using that set of numbers as a proxy for the average interest rate paid by everybody else on all the debt owed other than the Federal debt. I'm calling this interest rate the PAIR, or Proxy Average Interest Rate.

I took and slapped the FEDFUNDS rate onto the graph, for comparison:

Graph #2: PAIR and the Federal Funds Rate
PAIR and FEDFUNDS move in the same general direction, up together until the early 1980s, and down together thereafter. FEDFUNDS is a lot more variable, of course, but that's because the Fed jerks it around to influence economic activity. Then too, the PAIR is an average interest rate for debt accumulated over many years, so you might expect it to be slow-moving.

As the FEDFUNDS rate is essentially the lowest interest rate we have in the US, I have to say the PAIR is really a lowball estimate. Probably a good average for government debt, but even the red line is probably lower than the actual average interest rate on private sector debt.

No comments: