10 Jun 2012

US Consumer Debt and Interest Charges - $280 billion a year for the banks

I've been trying to get a clearer idea about just how much the banking sector manages to suck out of the economy by charging interest for lending money that they create out of thin air. For government debt, we know that the 27 European Countries collectively owe €10.42 trillion to the banks, and that the interest charges on these loans cost European Taxpayers €370.8 billion in 2011. But of course, those interest charges correspond to loans that were made before the current crisis kicked in, and it is quite likely that the total that will have to be paid in the future could be much higher.

But the banks don't just make their profits by lending the money to governments (at almost zero risk) and charging interest. They can also create money to lend to consumers and charge interest on that. Is there any way to know how much money they "make" using this wonderful scheme?

Well, I've just discovered that in the US, the Federal Reserve has an interesting webpage where you can find out about the amount of consumer debt and the interest rates that are being charged. The latest numbers, published on the 7th of June showed that total US  consumer debt has increased 3% in the last year to reach $2.55 trillion. Note that this doesn't include loans for house purchases. They also give numbers for the average interest rates charged for a 24 month personal loan (10.88% in Feburary 2012) and for Credit Card plans (13.04%).

They don't actually tell us precisely how much total interest was paid on the $2.55 trillion of outstanding debt, and it's true that 4-year loans for buying cars can be found at the bumper discount rate of just 5.07%, but if we take a typical value of around 11%, I think we can assume that the interest payments are probably running at something like $280 billion a year. That's a pretty good return for lending money when you didn't actually have the money to lend in the first place.

The website also allows you to download the historical data in the form of a graph. Here are the numbers since 1972.

As you can see, the interest rates on credit cards (orange line - figures available since 1995) and 24 month personal loans (red line) have always been at well over 10% and have often reached values of 15% and more. And at the same time the total amount of debt (green line, in millions of dollars) has been going through the roof.

It would be interesting to know where the hundreds of billions of dollars that get paid every year in interest payments end up.

Is there an alternative? Yes. It would involve removing the ability of commercial banks to create money for profit, and make money creation the sole responsability of central banks. In such a system, money creation would be done uniquely to fund actions that are in the public interest. It all makes perfectly good sense to me.

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