<p>Annual revenue is the value of all that is sold in a year by a particular business.  Nominal GDP in a year is the spending in the entire economy in a year.  If a business' annual revenue, <code>R</code>, grows at the same rate as nominal GDP, then revenue increases by <code>N * R</code> where <code>N</code> is the rate of nominal GDP growth.</p>
<p>Thus <code>deltaR = N * R</code>.</p>
<p>Suppose the business is a borrower.  Suppose the average business has debt, <code>D</code> equal to annual revenue. Thus <code>D = R</code>.  There is no such thing as the average business and some businesses are much more indebted than others but just go with it.</p>
<p>From the foregoing, <code>deltaR = N * D</code>.</p>
<p>Suppose the cost of earning that incremental revenue is zero. This is unrealistic but it can be a real world approximation if you can get workers to &quot;go the extra mile&quot; without asking for anything in return other than making it a little more likely that they keep their jobs. Material input costs incurred to earn that incremental revenue are not realistically zero but suppose the business can find a way to stretch their materials.</p>
<p>If labour and materials can both be stretched in this way then all the incremental revenue can be incremental operating profit.</p>
<p><code>deltaO = deltaR</code></p>
<p>From the foregoing, <code>deltaO = N * D</code>.</p>
<p>Let <code>i</code> be the interest rate.  So the debt grows by <code>i*D</code> each year.</p>
<p>Let <code>deltaD = i * D</code>.</p>
<p>If the Peoples' Bank of China keeps interest rate <code>i</code> less than <code>N</code>, then <code>deltaD</code> will be less than <code>deltaO</code>.  This means the incremental operating profit is enough to cover incremental interest so that the debt does not grow.  Thus the debt is sustained.</p>
<p>Households deposit money in banks to earn interest at a rate not the same as but related to <code>i</code>. If the PBoC suppresses <code>i</code> it is suppressing what households earn so it is as if the households are forced to sustain business debt.</p>
<p>Since there are certain assumptions in the foregoing, to the degree the assumptions are quantitatively misstated, it cannot be said that <code>i &lt; N</code> is a threshold for debt sustainability so what the PBoC said is not much different from saying that it will suppress <code>i</code> to help businesses, but comparing <code>i</code> to the nominal GDP growth rate gives a clue about the PBoC's thinking.</p>

CC BY-SA 4.0
2023-07-28T12:05:19.600Z
@qinnairen Please select my answer.
H2ONaCl
CC BY-SA 4.0
2023-06-03T04:37:38.303Z
2023-07-15T07:09:13.363Z
2023-07-15T07:09:13.363Z
H2ONaCl
<p>&quot;the PBoC said it would keep interest rates below the nominal GDP growth rate as a way of maintaining debt sustainability. But this only makes debt &quot;sustainable&quot; by implicitly allocating part of the debt-servicing cost to net savers (i.e. households).&quot;</p>
<p>I read this on a Twitter thread. I don't understand it fully. Please explain this to me as if I am a 5 year old</p>

<gdp><interest-rate><economic-growth><debt><china>
China interest rates
qinnairen
# China interest rates

(Asked by: username_0 on 2023-06-02)

"the PBoC said it would keep interest rates below the nominal GDP growth rate as a way of maintaining debt sustainability. But this only makes debt "sustainable" by implicitly allocating part of the debt-servicing cost to net savers (i.e. households)."

I read this on a Twitter thread. I don't understand it fully. Please explain this to me as if I am a 5 year old

**Tags:** gdp, interest-rate, economic-growth, debt, china


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## 1 answers

### Answer by username_1 on 2023-06-03. Score: 1

Annual revenue is the value of all that is sold in a year by a particular business. Nominal GDP in a year is the spending in the entire economy in a year. If a business' annual revenue, `R`, grows at the same rate as nominal GDP, then revenue increases by `N * R` where `N` is the rate of nominal GDP growth.

Thus `deltaR = N * R`.

Suppose the business is a borrower. Suppose the average business has debt, `D` equal to annual revenue. Thus `D = R`. There is no such thing as the average business and some businesses are much more indebted than others but just go with it.

From the foregoing, `deltaR = N * D`.

Suppose the cost of earning that incremental revenue is zero. This is unrealistic but it can be a real world approximation if you can get workers to "go the extra mile" without asking for anything in return other than making it a little more likely that they keep their jobs. Material input costs incurred to earn that incremental revenue are not realistically zero but suppose the business can find a way to stretch their materials.

If labour and materials can both be stretched in this way then all the incremental revenue can be incremental operating profit.

`deltaO = deltaR`

From the foregoing, `deltaO = N * D`.

Let `i` be the interest rate. So the debt grows by `i*D` each year.

Let `deltaD = i * D`.

If the Peoples' Bank of China keeps interest rate `i` less than `N`, then `deltaD` will be less than `deltaO`. This means the incremental operating profit is enough to cover incremental interest so that the debt does not grow. Thus the debt is sustained.

Households deposit money in banks to earn interest at a rate not the same as but related to `i`. If the PBoC suppresses `i` it is suppressing what households earn so it is as if the households are forced to sustain business debt.

Since there are certain assumptions in the foregoing, to the degree the assumptions are quantitatively misstated, it cannot be said that `i < N` is a threshold for debt sustainability so what the PBoC said is not much different from saying that it will suppress `i` to help businesses, but comparing `i` to the nominal GDP growth rate gives a clue about the PBoC's thinking.

> **Comments:**
> **username_1**: @username_0 Please select my answer.  

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