The Benefits of Membership
An article in last Wednesday’s NYT included a pretty remarkable statistic. Steven R. Weisman cited Diana Farrell, director of the McKinsey Global Institute, who estimates that petrodollars have held American interest rates three-quarters of a percent lower than they would have been otherwise.
The macroeconomics behind the rate supression are simple—more available dollars = more available credit = lower interest rates—but consider for a moment what it means in real terms. Wednesday’s NYT quoted the 30-year fixed mortgage rate at 5.80%, which means that a homeowner with a $300,000 mortgage would pay $1760/month. Now let’s assume that Farrell is right about the 0.75% suppression. Without the lower credit made possible by petrodollars, the same homeowner would be looking at a 6.55% interest rate, which translates into a $1906 monthly payment. The difference, then, turns out to be $146 per month, or $1,752 per year. Which means that the mortgage of our fictional American homeowner is being effectively subsidized by oil money to the tune of 8.3% overall. And that’s not saying anything about all of the other places the interest-rate suppression affects our lives (credit cards, car loans, etc.).
The troubling thing about this oil subsidy—for Americans, anyway—is not that it’s happening but that it could disappear someday very soon. [Read more]
