Sunday, 6 November 2011

Purchasing Power

Following on from my previous post on liquidity, you can think of a person or organisation's  purchasing power as the sum of currently liquid assets plus the set of liquid assets of other people which you've rented out.  

Your rental charge will compensate them for their foregone risk free rate plus a credit spread reflecting how much confidence they have in your ability to pay any used credit back.  Plus any cut the arranging institution takes (the bank as middle man).  This rental charge can variously appear expressed as a rate of interest, as a fixed fee, as a service commission, or some combination of them all.  From a finance theory point of view, it doesn't much matter.