The Cost of Capital

This post from Mises Blog makes some good points about John Snow's comments on interest rates.

"Interest rates are the price of capital. As profits increase, there is going to be a need for a capital-rationing process," Treasury Secretary John Snow told a British newspaper, as quoted in the Washington Post. "I'd be frustrated and concerned if there were not some upward movement" in rates.

Snow is mostly all wet. Interest rates are the price of credit, or equivalently, the price of time, the intertemporal price, not the price of "capital." The term capital is used in a variety of ways, and it's poorly used in this context, even if we add the adjective "financial."

Price of capital, or cost of capital as it is more commonly referred to in business meetings, depends on the company, it's credit rating, and the method of raising capital. I'm a little surprised that Snow said this the way he did, but maybe he meant something different, or was taken out of context. I'll give him the benefit of the doubt for now.

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