5 Aug 2023

The cost of interest payments - $13 trillion a year, increasing to over $18 trillion in 2025

I'm continuing with my crusade against the insanity of increasing interest rates "to control inflation". I was impressed by a report in the Economist from February saying that "The world's interest bill is $13 trillion - and rising". They estimated the interest bill for companies, households and governments across 58 countries that together account of 90% of global GDP.  They found that in 2021, the interest bill was $10.4 trillion - or 12% of combined GDP. By 2022, because of increases in interest rates, the number had increased to $13 trillion - or 14.5% of GDP - hence the headline.

Now, the Institute for International Finance, publishes its quarterly Global Debt monitor, which reported that at the end of Q1, debt had increased another €8.3 trillion to $305 trillion. This implies that the average interest rate on that debt is roughly 4.3%. That sounds plausible. It can be less, but can easily be much more - think of the interest rates charged by credit card companies. Current average rates in the US are 24.5% according to Forbes.

But, as we know, Central Banks such as the Bank of England have been jacking up base rates, and while some of the rate changes take effect immediately, others take longer - particularly when fixed rate mortgages with short term periods of 2 or 5 years come up for renewal. 

Back in February, this showed that interest costs are expected to reach around 17% of GDP anyway. But that an extra 1% increase in base rates in 2023 would lead to more than 20% of GDP being used to pay interest charges. Assuming that GDP is around $90 trillion, this implies that interest payments could easily reach $18 trillion a year. 

And that's with a relatively modest 1% hike. The Bank of England has just made its 14th consecutive increase in rates to 5.25%, with 5.75% anticipated by the end of the year. 

Now, the argument is that these rate increases help control inflation by reducing the desire to take out more loans (which, if you know how the system works, means the amount of money created out of thin air by commercial banks). 

But, above all, it triggers a massive transfer of our money to the banks - either because we borrowed money ourselves, or because we have to pay higher prices to businesses whose interest charges are increased, or because our governments have to pay higher interest charges on government debt.  Remember that in 2022, Eurozone interest payments on government debt increased by a staggering 25.3% from the figures in 2021 to reach €227 trillion.  Would anyone care to guess what Eurozone taxpayers will have to fork out for 2023? 

And where does all this money go?

Does it go to cover the cost of health care, education, tackling climate change (or any of a large number of other vital things)? 

Nope. The vast majority of those interest payments go to commercial banks and other financial institutions, allowing them to pay massive payouts to shareholders and bankers.

There's a Youtube site called "Economics Explained" with 2.28 million subscribers that recently put out a video called "What everyone gets wrong about global debt"

The video contains some sensible stuff - it mentions the $305 trillion figure for global debt, and gives a $1 quadrillion figure for global assets, suggesting that the net worth of the planet is around $700 trillion. 

But when they ask the question of who the $305 trillion is owed to, they say that "95% of all the wealth or the net worth of the world; including the $300 billion owed in debts, is owned by households and the other five percent is owned by governments and businesses that are primarily responsible for creating value". 

They go on to say that "Global debt isn't a problem" and that "on a global scale we just owe this debt
to ourselves"
This is the most incredible slight of hand. The critical issue is who owns the $305 trillion of debt - not who owns the $1 quadrillion in assets. And even more importantly, who gets the $18 trillion a year (or more) in interest payments that we will collectively be paying in a couple of years. 

No, we don't pay the interest "to ourselves". We pay it to the financial sector, and in particular, the commercial banks who have the right to create the money supply and charge us all interest. No surprise that the rich asset holders get richer and richer, whereas nearly everyone else spends almost all their lives and time paying off interest. 

If you think that there maybe more useful things that could be done with $18 trillion every year, then maybe you will join me in trying to get this insane system changed?

Note added on 6th August. 
I had a look at another recent Youtube video from the people at "Economics Explained" - this one's called "Why inequality starts being a problem now". And they say it again - even more clearly. According to them, 95% of the $300 trillion in global debt is owned by households - we owe all this money to ourselves. Here's a frame from the video
And here's the transcript of the narration. 
"The remaining 95% of global debt is owned directly or indirectly by households. Most of this is controlled by corporations like Banks and companies with large treasury Holdings but households own those companies."
Come on, guys. I don't know exactly who you are. But can you be serious? It's not because banks have shareholders that they can be described as owned by households.

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