Korean Job Discussion Forums

[bacasper]

THE Most Important Chart of the CENTURY

This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation�s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

This is mathematical PROOF that debt saturation has occurred. Continuing to add debt into a saturated system, where all money is debt, leads only to future defaults and to higher unemployment.

This is the dilemma created by our top down debt backed money structure. Because all money is backed by a liability, and carries interest, it guarantees mathematically that there will be losers and that the system will eventually reach the natural limits, the ability of incomes to service debt.

actual chart and source data at link

[The Happy Warrior]

[bacasper]

[djsmnc]

Damn, where's my TI-86 when I need it?

[mises]

The chart is about the marginal productivity of debt. Here's an article about it (I posted this a year ago):

http://www.financialsense.com/editorials/fekete/2009/0330.html

The idea is that debt adds both costs and output up to a point of saturation, where the costs of the aggregate debt outstanding dominate any output benefits. Simply, if negative the MPD suggests the capital stock has effectively been depleted.

I see little reason to discard the reasoning and data behind the chart. I do have some concerns that the quadrillion in derivative contracts could rapidly make the situation worse.

The United States and many other OECD states need a debt jubilee. This could have been accomplished by the orderly (though rapid) collapse of the largest banks.

For example, Citi has assets (which are liabilities) that are on their books at historical or modeled cost and not fair market. If Citi had been allowed to collapse these assets would have been auctioned off at market (which would have been much lower than even the most pessimistic assume) and the loans renegotiated at their fair market value. So you own a house you bought for 500k that is now worth 250k and Citi holds the note. Citi collapses and bank X buys the note for 220k and cuts the principle on the mortgage to 220k (the government can force the reduction in principle as a % of the fair market value of the house, up to 100). Debt jubilee. The aggregate debt level in the society is dramatically reduced and we're past the crisis in a year or less. Instead, we're entering the third year with no end in sight. The big banks are bigger despite the terrible quality of their balance sheets. The new debt created is offset by the massive non-performing debt overhang.

The problem is that we continue to ask economists to fix an accounting problem. Economists look at economic characteristics that are irrelevant in a balance-sheet depression.