A Dire Warning
By: Keith Weiner
GoldSeek.com
Monday, 30 July 2018
Let’s return to our ongoing series on the destruction of capital, and how to identify the signs. Steve Saville posted a thoughtful article this week entitled The “Productivity of Debt” Myth. His article provides a good opportunity to add some additional thoughts.
We have written quite a lot on this topic. Indeed, we have a landing page for marginal productivity of debt (MPoD) with four articles so far. Few economists touch this topic, perhaps because MPoD 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!
So when Lacy Hunt wrote in the Hoisington quarterly letter about Diminishing Returns – Consequences of Excess Debt (p. 4), several readers forwarded the link to us. And this week Steve Saville wrote a response to Lacy’s discussion.
We have our own concerns with Lacy’s approach. One is his statement:
“In addition to capital, output is a function of labor, natural resources and technology. Thus, one of these latter three factors must accelerate in order to offset the overuse of debt…”
Unless one considers entrepreneurial innovation to be just a type of “technology”, this formulation is missing something even on its own stated terms. But more broadly, it does not address the problem of interest rates. If companies can borrow at 2%, then there will be scant business opportunities that generate more than about 3%. The marginal productivity of the entrepreneur is brought down by the falling interest rate. The same “inputs” of labor, resources, and technology will yield different results at different interest rates.
Marginal Productivity of Debt
However, today we want to address the points raised by Steve. All indented quotes below are his.
“According to Hoisington and many other analysts, the problem is encapsulated by the falling trend in the amount of GDP generated by each additional dollar of debt, or, looking from a different angle, by the rising trend in the amount of additional debt required to generate an additional unit of GDP. However, there are some serious flaws in the “Productivity of Debt” concept.”
It may seem a minor quibble, but we must say the concept is not productivity of debt, but marginal productivity of debt. The debt as such is not producing anything. At issue is the marginal dollar of debt, and how much it adds to productivity at the margin.
“There are three big problems with the whole “it takes X$ of debt to generate Y$ of GDP” concept, the first being that GDP is not a good indicator of the economy’s size or progress.”
We agree 100%, and have argued many times that GDP = production + destruction. If you pay 1,000 men to dig a useless hole, and then pay 1,000 more men to fill it in, it is true that this adds to GDP. This is not an argument in favor of digging useless holes, or Keynesian stimulus. It is a damning indictment of GDP.
GDP is a statist’s tool. Its use generally promotes statist measures (e.g. Keynesian stimulus aka pork barrel spending). It should be noted that GDP’s flaws will tend to overstate real growth in the economy, for reasons Steve cites and because the statists want to overstate it. The promise of growth is a powerful soporific. That’s one reason why so few economists are up on the rooftops bellowing about the long-term falling trend of MPoD and the eventual heat death of the economic universe (another is Andy Lees of MacroStrategy Partnership in the UK).
The Rest…HERE
