The Marginal Productivity of Antal E. Fekete

So I googled debt productiv and one of the options was marginal productivity of debt -- comparing increases in GDP to increases in total debt. Exactly what I was looking for. The first result for that was Antal E. Fekete - The marginal productivity of debt... | Facebook. Fekete's got this graph:

Graph #1. Source: Antal E. Fekete

One nice thing. Antal Fekete shows his calculation:

Marginal Productivity of debt = (Change in nominal GDP)/(Change in nominal debt)

Unfortunately, he doesn't identify his data. I tried to duplicate his graph using FRED's TCMDO debt, but it didn't seem to match up. So I'll just go with Fekete's graph.

He writes:

The marginal productivity of debt measures the change in (dollar) economic output for a dollar change in the aggregate debt outstanding... What has been happening to this measure over the decades?

Nominal debt outstanding has, of course, been accelerating rapidly and since 2008, the government’s share of that has been soaring. Allowing for the short term variation – it can be seen that the trend in marginal productivity of debt has been most definitely down. Once the zero bound is reached, any incremental increase in aggregate debt will have a detrimental impact on the economy.

Agreed. Of course, implicit in that last sentence there is the idea that rising total debt caused the downtrend in GDP growth. Oh, I think that's true, certainly. But people who make policy don't seem to agree. And people who vote are iffy.

On second thought, I don't agree that once the zero level is reached, any incremental increase in aggregate debt will have a detrimental impact on the economy. I think debt already had a detrimental impact on the economy, since the 1980s when it slowed our GDP growth trend... in the 1970s, when monetary policy had to fight inflation... and in the 1960s, when financial cost gave the initial push to the cost-push inflation.

Would you wait until adding to total debt decreases GDP to say there is a harmful effect? Or would you say what I say: If adding to total debt produces a smaller increase in GDP than it formerly did, then harm has already been done.


We come now to Fekete's analysis of his graph:

It can be seen that the ratio was around 1½ during the mid-1970s – meaning that for each dollar in marginal debt, $1.50’s worth of GDP growth occurred. This ratio was as high as 3 in the 1950s. Deterioration in the ratio could be argued as deterioration in the quality of the debt. What would cause the quality of debt to decrease substantially? The removal of the ultimate extinguisher of debt: gold. Gold prevented & cleared the build-up of toxic unproductive debt.

I can almost see the 1½ he's talking about. (I'm glad Fekete uses the Alt-0189 version of one-half.) And I can believe that the ratio was higher in the 1950s. But it is odd he doesn't show the 1950s on his graph, as the decade adds so much to his argument.

His numbers -- as much as $3 in GDP growth for each dollar of unidentified debt growth -- don't ring a bell with me. I'm sure I looked at this before and I don't remember anything like $3 per. Maybe I had it wrong. But it sure would help if Fekete said what debt he was using, and linked to a data source. He doesn't.

I can live with that. That's not what drives me to write this post. It's the next thing he says that gets me. Fekete writes: "Deterioration in the ratio could be argued as deterioration in the quality of the debt." What is that -- moral philosophy? It is surely not economics.

When debt is going bad, it is because people are not making the payments. That's what causes deterioration in the quality of debt. When it happens, lenders are liable to stop lending, or set higher standards. You know, to keep the deadbeats out. And when the economy goes bad they think we're all deadbeats.

Is that what Fekete means? Clearly not. "What would cause the quality of debt to decrease substantially?" he asks. "The removal of the ultimate extinguisher of debt: gold."

Fekete says debt productivity is down because we pay off debt with money that isn't gold. The only way this can make sense is if you assume from the start that money has to be gold and if it isn't, then every problem we have is a result of not using gold for money. But that's really not an analysis of the problem.

Nor does Fekete's view explain the problems that arose in the past, that forced us off gold.

If we no longer use gold for money, one could possibly argue that the quality of money has deteriorated, the intrinsic value, say. But that has nothing to do with debt. Fekete takes advantage of people's confusion about money and debt to make his argument.

And there could be some vague connection between "what money is made of" and "how happy people are to get their money back" from borrowers. But really, if you lend paper you can't honestly expect to be repaid in gold.

Furthermore, there is no connection between "what money is made of" and "how productive the things are that are done with money". To assume that there is, is to say something like If money was gold I would invent a new technology for getting to Mars, but money is paper so I'm gonna just get drunk instead.

That's not "rational" behavior.

Fekete's analysis is terribly disappointing. But now, look at the timing. What caused the ratio to decline? Going off gold, he says. Going off gold in the 1970s. (President Richard M. Nixon "closed the gold window" on August 15, 1971.)

We can't see it on Fekete's graph, but he suggests that the marginal productivity of debt fell from $3 in the 1950s to less than $1.50 by 1975. Does he want us to think that all of this decline happened after 15 August 1971? I don't buy it. But even if that were the case, the decline could be due entirely to the very same cause that led to the closing of the gold window. Fekete does not discuss this.

Meanwhile, I don't see how any of this has any bearing on the things people do with the money they borrow, or how productive those things are.


I made a copy of Fekete's graph and eyeballed-in some trend lines:

Graph #2: Same as Graph #1 with Trend Lines Eyeballed In

I see a down-trend from 1975 to 1986, and a downtrend from 2000 to the crisis. And a downtrend overall, sure. But there is a stretch there, from 1986 to 2000, when the marginal productivity of debt increased with persistence and regularity. How is this possible? Did we go back on gold?

We did not.

Obviously it wasn't going off gold that caused the long-term decline.


Now, my version of the 1986-2000 phenomenon...

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 falls behind. Thus is the decline in the marginal productivity of debt explained.

The reverse is also true: As debt falls in size relative to circulating money, the cost of debt falls relative to the money we have. This reduces financial cost, boosting wage and profit income in the productive sector. Improved growth follows.

The downward shift of the debt-per-dollar ratio opened the door to improvement in real and potential GDP performance. We can repeat that success. We can do better.

We must do better.