Cost of Interest
Placeholder Picture
People who earn interest on their investments believe that interest is helping them "get ahead". Interest income gives them more money to spend, so it must be good.

But it's only good if it gives them more income than it costs them to get it. If I earn $100 in interest income but the cost of interest that's embedded in the prices of all the things I buy is $150, then I'm not really getting ahead at all. I'm losing $50. I would actually have more purchasing power, if interest was abolished.

If you look at the distribution of interest income and expenses in the economy, it becomes glaringly obvious that the household sector (that's individuals and families) are the big losers of the interest game. The household sector ultimately pays all of the interest costs in the economy. They pay their own interest costs on mortgages, loans and consumer credit. But they also pay all of the corporate sector's interest costs which are embedded into consumer prices. Plus they pay all of the government sector's interest costs which are embedded into taxes. (see also: Interest... a Form of Private Taxation)

In 2011, total interest expenditure in the economy was $300.9 billion. The interest income of households was just $96.9 billion. Interest cost the household sector more than 3 times the income it gave them. The net cost of interest (expenditure less income) was 1/5 of all after-tax household income, 1/4 of pre-tax wages & salaries and 1/3 of after-tax wages & salaries. Clearly the household sector would be better-off financially without interest.

Here is a summary and analysis of Statistics Canada's 2011 interest distribution figures.
Placeholder Picture