Mortgage rate: 6.5% If indexed: 1.2%. Three Nobelists approve.

Of course the headline sounds preposterous; it is preposterous. But it's true, and there's no trick. People have been explaining this fervently for 204 years; I've been one of them for 41 years. I'll eventually be presenting a history of what kept the news from those whose lives it would have changed, with such lessons as I see, but for now here's enough to get the ball rolling: a few quotes and links, followed by an explanation of what the "nominal interest rate" is, and how wealth-measure finance (to name it after the desired effect rather than the technique of indexing) works.

The greater part of the payments designated 'interest' have really been a repayment of principal... the mislabeling of principal payments as interest payments... prices housing out of the reach of many. If the 14% were correctly labeled... the effective interest rate would be 4%.

The greater part of the payments designated 'interest' have really been a repayment of principal... the mislabeling of principal payments as interest payments... prices housing out of the reach of many. If the 14% were correctly labeled... the effective interest rate would be 4%.

PLAM (price level adjusted mortgage: his term for "indexed") does appear to offer a more complete solution... through a contract which, in effect, produces the same real effect as would the traditional mortgage in the absence of inflation - and does so no matter what the rate of inflation either anticipated or realized.

PLAM (price level adjusted mortgage: his term for "indexed") does appear to offer a more complete solution... through a contract which, in effect, produces the same real effect as would the traditional mortgage in the absence of inflation - and does so no matter what the rate of inflation either anticipated or realized.

The indexation of payments makes excellent sense for all sorts of long-term contracts. Future payments should not be expressed in currency units, but instead tied to an index of consumer prices or an index of wholesale prices, of wages, of incomes, or of components of income. History shows that the real value of currency units has been so unstable that it is better to use practically any one of these indexes to specify future payments in contracts than to specify payments in terms of fixed currency

The indexation of payments makes excellent sense for all sorts of long-term contracts. Future payments should not be expressed in currency units, but instead tied to an index of consumer prices or an index of wholesale prices, of wages, of incomes, or of components of income. History shows that the real value of currency units has been so unstable that it is better to use practically any one of these indexes to specify future payments in contracts than to specify payments in terms of fixed currency

Clawback: nominal interest rates are what they are because of a crude, thoroughly thoughtless response to inflation. Inflation - where debt is defined in terms of the currency unit - shrinks the debt, in value. This can bankrupt lenders; it did on a large scale in the S&L crisis of the 1980s. Because of this, currency loan lenders are obliged to guess at what inflation will be over the life of the loan - and tack this onto what they call interest. In real terms, it's the premature clawback of principal. If the lenders guess right, they stay solvent - paid back prematurely by false interest that offsets the shrinkage of their asset. However, the elevated rates reduce borrowing power, so they can lend less to each client, and are obliged to hunt out more clients, and also to waste time and effort churning the capital back out again.

TOFLI: tax on false lender income: the government, no wiser than the banks, treats clawback as lender income (which it isn't: it's capital coming home). Lenders of course have to cover this as well, so it becomes the third component of nominal interest. For institutional lenders in the US, the tax rate is 21%. This must be compounded - there will be tax on the tax-offsetting charge, and so on - the sum of a geometric sequence, 1/(1-.21) which brings TOFLI in at 27% of clawback.

I refer to the total as RICTOFLI: real earned interest + clawback +TOFLI. So, in the US today, the equation is:

RICTOFLI 6.5% = real interest 1.2% + clawback 4.2% + TOFLI 1.1%

Payment values are stable for an indexed loan, but decline with the currency unit for a currency loan. The concept of harnessing a lifetime of earning power is thrown away.