Tuesday, July 16, 2013

And, Declining "Marginal Productivity of Debt" Explained

From mine of 10 July:

A decline in debt growth begins in 1986:

Graph #3: Beginning in 1986 there was a strikingly unusual fall in
the growth of total debt that lasted into the early 1990s.

An increase in money growth soon follows:

Graph #4: Before that decline of debt growth had ended, an increase in the growth of
circulating money was under way. This increase lasted to the mid-1990s.

These patterns shift the "debt per dollar" ratio, 1990-94:

Graph #5: The declining debt growth, combined with the rising money growth, meant for people who use money that we were relying less on money with the extra cost of interest, and relying more on money without that extra cost. We were able to save money on our money. That's got to be good for the economy!

In response, best-case GDP improves almost immediately:

Graph #6: Potential GDP shows a full percentage point improvement between 1993 and 2000,
in response to the reduced ratio of accumulated debt to circulating money.

As debt grows in size, the increasing cost of it increasingly hinders both production and consumption. As debt grows in size, therefore, the growth of output is left behind. Thus is the decline in the marginal productivity of debt explained.

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