2009-04-13

Antal E. Fekete: The Marginal Productivity of Debt

Andy Xie argued for stagflation in the coming years, but Antal E. Fekete argues a much more sinister deflation could be in the cards. His article focuses on the marginal productivity of debt. How much GDP growth can you achieve with an additional $1 in debt? He claims that in the 1950s, every new dollar of debt generated $3 in GDP growth. By 2006, however, this number went into negative territory.

Why is a negative marginal productivity of debt a sign of an imminent economic catastrophe? Because it indicates that any further increase in indebtedness would necessarily cause economic contraction. Capital is gone; further production is no longer supported by the prerequisite quantity and quality of tools and equipment. The economy is literally devouring itself through debt. The message, namely that unbridled breeding of debt through the serial cutting of the rate of interest to zero was destroying society’s capital, has been ignored. The budding financial crisis was explained away through ad hoc reasoning, such as blaming it on loose credit standards, subprime mortgages, and the like. Nothing was done to stop the real cause of the disaster, the fast-breeder of debt. On the contrary, debt-breeding was further accelerated through bailouts and stimulus packages.

In view of the fact that the marginal productivity of debt is now negative we can see that the damage-control measures of the Obama administration, which are financed through creating unprecedented amounts of new debt, are counter-productive. Nay, they are the direct cause of further economic contraction of an already prostrate economy, including unemployment.


Read the whole article, it's good throughout. Ponder the connection with China, considering banks have lent almost as much money in the first three months of 2009—— during a period of slow growth——as they did in all of 2008.

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