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Understanding the marginal productivity of debt is key to understanding whether the amount of credit created is unsustainable, resulting in the failure of the monetary system and loss of everyone’s savings.
Falling Productivity of Debt introduces the idea of the marginal productivity of debt, that is, how much additional GDP is added for each newly-borrowed dollar.
In Falling Interest, Keith explains why the marginal productivity of debt is higher after the financial crisis despite the inexorable collapse of interest rates.
Heat Death of the Economic Universe explores whether our economy and its monetary system is sustainable. Will credit continue to grow, and with it the economy? Or will some force—or law of economics—prevent slow and stop it?
A Dire Warning Few economists touch Marginal Productivity of Debt, perhaps because it shows that our monetary system is failing. We encourage you to do a Google search, and you will see scant mention other than articles by Keith and Monetary Metals. This is tragic. Every monetary economist should be bellowing from the rooftops about the falling marginal productivity of debt!
Keith-
Two possibilities for the relative improvement in the debt prod. number since 2009. First, is the global central bank stimulation. This would show up elsewhere but not in US debt numbers. Especially BOC which I would imagine has a chart that looks decidedly worse since 2009, given their massive debt increase (shadow included) and suspicious GDP numbers in terms of quality. This does flow to US GDP through equities and real estate and the general real economy as well. Secondly, would be derivative growth. These can be off balance sheet from a debt perspective but flow to earnings in a profit situation.
Great article Keith, many thanks!
Looking at the chart, ‘mpd’ peak to trough since 2010 is 80 cents or more, like a big dose of morphine for a short term boost that quickly fades.