The Marginal Productivity Of Debt

[Green_Bear]

** THE MARGINAL PRODUCTIVITY OF DEBT**
Why Obama’s Stimulus Package Is Doomed to Failure
by Antal E. Fekete, Professor of Money and Banking San Francisco School of Economics
March 30, 2009
financialsense.com/editorial … /0330.html

Paper mill on the Potomac

The paper mill on the Potomac is furiously spewing up new money. According to the manager of the mill, as indeed according to the Quantity Theory of Money, this should stop prices from falling and the economy from contracting.
In this article I present an argument why this conclusion is not valid. On the contrary, I shall show that new money created on the strength of a flood of new debt, is tantamount to pouring gasoline on the fire, making prices fall and the economy contract even more. The Obama administration has missed its historic opportunity to stop the deflation and depression inherited from the Bush administration because it entrusted the same people with the task of damage-control who had caused the disaster in the first place: the Keynesian and Friedmanite money doctors in the Fed and the Treasury.

The watershed year of 2006

As long debt was constrained by the centripetal force of gold in the system, tenuous though this constraint may have been, deterioration in the quality of debt was relatively slow. Quality caved in, and quantity took a flight to the stratosphere, when the centripetal force was cut and gold, the only ultimate extinguisher of debtthere is, was exiled from the monetary system. Still, it took 35 years before the capital of society was eroded and consumed through a steadily deteriorating marginal productivity of debt.

The year 2006 was the watershed. Late in that year the marginal productivity of debt dropped to zero and went negative for the first time ever, switching on the red alert sign to warn of an imminent economic catastrophe. Indeed, in February, 2007, the risk of debt default as measured by the skyrocketing cost of CDS (credit default swaps) exploded and, as the saying goes, the rest is history.

[ixus]

Good read GB. cheers.

[tim2005]

i accept that printing money increases neither wealth nor purchasing power. but doesn’t the nominal value of goods (almost) have to increase eventually - if enough money is printed? (like in zimbabwe)

[Green_Bear]

I accept that printing money increases neither wealth nor purchasing power. but doesn’t the nominal value of goods (almost) have to increase eventually - if enough money is printed? (like in zimbabwe)

Not necessarily. The price of electronic goods fell in price for the last decade due to global wage arbitration between higher cost and lower cost countries (Ireland used to make a lot of computer components), economies of scale due to the concentration of global manufacturing in China and pegging of currencies in order to maintain advantage over rival trade partner. However in Ireland inflation found another outlet in the cost of services, especially those provided by the state (example Health, “benchmarking”, quangos, pensions ) rose and rose as more money was pumped into the public sector on the back of taxation on people borrowing greater amounts to buy property, the result is the quality of most state state services did not improve substantially, but they now cost more.

Annual Irish Consumer Price Inflation was 5.0% in May; Excluding mortgage interest, the rate was 2.6% - Service inflation was 9.1%
By Finfacts Team, Jun 7, 2007
finfacts.com/irelandbusiness … 0275.shtml

Prices can also rise in response to supply problems, for example materials such as Lithium used in batteries

World Lithium Supplies and Electric Vehicles.
3 Jun, 2008 10:58 am
scitizen.com/stories/Future- … Vehicles-/

Finally the cost of servicing the debt from the property bubble across both private and public sector, these costs are also passed on in the costs of goods and services, but the credit and money supply is shrinking making the cost of servicing the debt even more burdensome.

[windy]

I accept that printing money increases neither wealth nor purchasing power. but doesn’t the nominal value of goods (almost) have to increase eventually - if enough money is printed? (like in zimbabwe)

Not necessarily. The price of electronic goods fell in price for the last decade due to global wage arbitration between higher cost and lower cost countries (Ireland used to make a lot of computer components), economies of scale due to the concentration of global manufacturing in China and pegging of currencies in order to maintain advantage over rival trade partner. However in Ireland inflation found another outlet in the cost of services, especially those provided by the state (example Health, “benchmarking”, quangos, pensions ) rose and rose as more money was pumped into the public sector on the back of taxation on people borrowing greater amounts to buy property, the result is the quality of most state state services did not improve substantially, but they now cost more.

Annual Irish Consumer Price Inflation was 5.0% in May; Excluding mortgage interest, the rate was 2.6% - Service inflation was 9.1%
By Finfacts Team, Jun 7, 2007
finfacts.com/irelandbusiness … 0275.shtml

Prices can also rise in response to supply problems, for example materials such as Lithium used in batteries

World Lithium Supplies and Electric Vehicles.
3 Jun, 2008 10:58 am
scitizen.com/stories/Future- … Vehicles-/

Finally the cost of servicing the debt from the property bubble across both private and public sector, these costs are also passed on in the costs of goods and services, but the credit and money supply is shrinking making the cost of servicing the debt even more burdensome.

So we exported inflation to china .The price was we lost our manufacturing base.

[The_Unwelcome_Guest]

The price was we lost our manufacturing base.

What’s all this “we” business, paleface?

[Green_Bear]

A CRITIQUE OF THE QUANTITY THEORY OF MONEY
by Antal E. Fekete, Professor of Money and Banking San Francisco School of Economics
April 13, 2009
financialsense.com/editorial … /0413.html

Further evidences of the onset of Great Depression II

Money out of the thin air?

Detractors of our fiat money system (myself not included) are fond of saying that “the Fed is creating money out of the thin air.” If that were true, then the Quantity Theory of Money (QTM) might be valid implying that the present runaway money-printing exercise would indeed lead to hyperinflation before long. How could anyone suggest that the denouement will be deflationary after all?

I maintain that the Federal Reserve banks are not creating money out of the thin air. In fact, they must first post collateral with the Federal Reserve Agent (who is not under the jurisdiction of the Fed but under that of the government). Only after the collateral has been posted can they create a commensurate amount of Federal Reserve notes and deposits. Typically, the collateral is U.S. Treasury bills, notes, or bonds, purchased in the open market on behalf of the Fed’s Open Market Committee.

Because open market purchases of Treasury paper have consequences, we must examine them before passing a judgment on the validity of the QTM. Such an examination is always side-stepped by the devotees of the QTM. What are those consequences? They are the effect of open market operations on the rate of interest. Since open market purchases of the Fed involve bidding up the price of government obligations which varies inversely with the rate of interest, we can say that they will make interest rates fall. (To be sure, on occasion, the Fed may be a seller of Treasury paper but, on a net basis, it has been a buyer every single year.)

This means that the regime of irredeemable currency, depending as it is on the open market operations of the Fed for its existence, imparts a definite bias to the interest rate structure establishing a falling trend, whereas interest rates would be stable in the absence of that regime. This in itself is a condemnation of irredeemable currencies as they introduce an unwarranted bias into the economy favoring debtors and spenders while punishing creditors and savers. In addition, it favors the financial sector at the expense of the producing sector. Falling interest rates, as opposed to low but stable ones, are detrimental to productive capital.

Note, this is a long article