Price of Money
Today, I have not done much about anything. Mostly, I spend most of my time thinking about the interest rate, or the price of money. It is so hard to think about it. There is no beginning. There is no end. Interest rate is such a simple mathematics. But it has becoming the very fabric of life for everyone on the Earth. This fabric is so large and it can cover the entire Earth. This current financial meltdown is actually caused by the cloud of interest rate. It is so thick so that there is no sunshine can go through this cloudy fabric. Everything underneath this cloudy fabric cannot grow. Unless someone can poke holes into this cloudy fabric, everything underneath will wither.
In any economics books, paying interests for loans seems so natural. Except figuratively saying something like that the interest rate is the price of money. No textbook explain the origin of the interest rate or the potential danger of interest rate to the uneducated consumers. Everyone is connected to other via the interest rate. Everything in this current world is somehow related to interest rates.
First, the US federal government debt is about eleven trillion dollars. The average interest rate for all outstanding debt is about 4%. The annual interest payment is about 440 billion dollars, which is then paid by tax payers. The US government would not function at all if they stopping issuing more treasury bills, notes or bonds. It seems the biggest function of US government is to issue government debts and to pay interest to debt holders.
Second, state and local governments are also heavily depending on debts to survive. The municipal bond market is not as big as the US treasury securities. But it is big enough for more than 100 mutual funds which are specialized in municipal bonds.
Third, the corporations are totally depending on bonds and stocks to survive. In this world financial market meltdown, everyone has seen how the stock prices and bond values change every second. The stock price for Citigroup fell from more than 50 dollars per share to under one dollar per share over a very short period of time. The bond prices have also gyrated at similar level.
Forth, every consumer in the United States is similarly in debt. They borrow for almost everything from housing to household products. They use mortgage for housing. They use credit cards for everything else. It seems they could not survive if they do not borrow money.
The total outstanding debt in the United States is approximately 50 trillion dollars. If the average interest rate is 6%, which is a very moderate assumption, the total annual interest payments can amount to 3 trillion dollars. The total US GDP is about 12 trillion. So a quarter of US GDP is debt payments. In other words, the capitalists taken about ΒΌ of total wealth created each year, just by using the magic words of interest rate.
The consumers have evolved from goods consumers to money consumers. For most of US households, more than 50% of spendable household income is for interest payments. In other words, if the consumers do not borrow, they can live twice as good if they buy everything with cash.
This financial meltdown in the US and the world is actually the meltdown of debts. The interest payments are becoming too much a burden for many consumers.
I do not fully understand the overreaching complexity of interest rate. But the dangerous side of interest rate is becoming obvious to me. In this world, one should never be on the paying side of interest rate. If possible, one should go to the receiving side of interest until the day when all interest rates are becoming zeros.
In any economics books, paying interests for loans seems so natural. Except figuratively saying something like that the interest rate is the price of money. No textbook explain the origin of the interest rate or the potential danger of interest rate to the uneducated consumers. Everyone is connected to other via the interest rate. Everything in this current world is somehow related to interest rates.
First, the US federal government debt is about eleven trillion dollars. The average interest rate for all outstanding debt is about 4%. The annual interest payment is about 440 billion dollars, which is then paid by tax payers. The US government would not function at all if they stopping issuing more treasury bills, notes or bonds. It seems the biggest function of US government is to issue government debts and to pay interest to debt holders.
Second, state and local governments are also heavily depending on debts to survive. The municipal bond market is not as big as the US treasury securities. But it is big enough for more than 100 mutual funds which are specialized in municipal bonds.
Third, the corporations are totally depending on bonds and stocks to survive. In this world financial market meltdown, everyone has seen how the stock prices and bond values change every second. The stock price for Citigroup fell from more than 50 dollars per share to under one dollar per share over a very short period of time. The bond prices have also gyrated at similar level.
Forth, every consumer in the United States is similarly in debt. They borrow for almost everything from housing to household products. They use mortgage for housing. They use credit cards for everything else. It seems they could not survive if they do not borrow money.
The total outstanding debt in the United States is approximately 50 trillion dollars. If the average interest rate is 6%, which is a very moderate assumption, the total annual interest payments can amount to 3 trillion dollars. The total US GDP is about 12 trillion. So a quarter of US GDP is debt payments. In other words, the capitalists taken about ΒΌ of total wealth created each year, just by using the magic words of interest rate.
The consumers have evolved from goods consumers to money consumers. For most of US households, more than 50% of spendable household income is for interest payments. In other words, if the consumers do not borrow, they can live twice as good if they buy everything with cash.
This financial meltdown in the US and the world is actually the meltdown of debts. The interest payments are becoming too much a burden for many consumers.
I do not fully understand the overreaching complexity of interest rate. But the dangerous side of interest rate is becoming obvious to me. In this world, one should never be on the paying side of interest rate. If possible, one should go to the receiving side of interest until the day when all interest rates are becoming zeros.
posted by Unknown at 12:11 AM
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