The idea conveyed by the phrase "the productivity of debt" is false. Debt cannot be productive. Debt is only the record of outstanding loans. It is new credit-use that creates "extra" spending in the economy. It is new credit-use that can have a "productive" effect.
And I prefer to think of the efficiency rather than the "productivity" of the new uses of credit.
So when I saw a discussion of "the extent that spending is credit-financed" (see yesterday's post) I jumped right on that. Because the extent of credit use must certainly be related to the efficiency of credit use.
It's a point that bears investigation. But my intuition says a Laffer Limit applies. On a scale of zero to 100%, as the extent of credit-use increases I expect to see the efficiency of credit increase, peak, and decline. I see the peak as an optimum range, where credit use is most efficient, where it makes the maximum contribution to GDP.
I think too little credit use undermines growth by inhibiting implementation of good ideas, for example, and too much credit use undermines growth by increasing financial costs.
I also think this conflicting duality -- the benefits of additional credit use in combination with the loss to accumulating debt -- is a powerful source of cyclic behavior, generating or helping to generate business cycles, long waves, and maybe even cycles of civilization.
So I was interested in dwb's comment at Tim Duy's Fed Watch, and his related comment at Modeled Behavior.
At Fed Watch, DWB looks at the "gdp/debt" ratio, says "think of debt+equity as capital" and reads the long decline of the ratio to mean "the marginal product of capital has declined over time".
This is a fancy way to say the productivity of debt has fallen.
In the comment at Modeled Behavior, DWB reiterates: "the ratio of GDP/debt really is fundamentally the GDP/capital ratio more or less."
"[G]oing back to the 1950s, there is a consistent increase [in debt/GDP], (or more pertinently, drop in GDP/Debt). there is no correlation to interest rates or money velocity, its not a “credit binge” thing."
It is not a credit binge thing. I thought that was interesting. I take it to mean that our economic troubles today are *not* the result of asset bubbles. Rather, that the asset bubbles are death throes coming at the end of a long, initially golden increase in the accumulation of debt. I agree.
On the other hand, if you want to think of the entire 1947-2007 period as one gigantic credit bubble, that sums it up perfectly.
DWB also says this:
Now, if you think of the “debt” as capital and suppose you need a real rate of return of, say, 4% then 4%*totaldebt/gdp is about 15% of gdp or less. yawn, not really so unsustainable is it?
Put it in context.
Consider one example.