Picture du Jour: Welcome to debt saturation

By Prieur du Plessis, on March 25th, 2010 posted in: Economy, Investment

Following the latest US Flow of Funds Accounts report, Nathan Martin of the FedUpUSA blog produced a fascinating chart. As shown below, it is constructed by dividing the change in GDP by the change in debt. It shows how much productivity is gained by infusing $1 of debt into the U.S. debt-backed money system.

Martin explains the graph as follows: “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 entered the system the productivity gained by new debt diminished. This produced a path that was following a diminishing line targeting zero in the year 2015. This meant 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!”

Martin concludes: “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. It explains the ‘jobless’ recoveries of the past and how each recent economic cycle produces higher money figures, yet lower employment. It explains why we are seeing debt driven events that circle the globe. It explains the psychological uneasiness that underpins this point in history …”

Ever wondered about the elephant in the room? This is it!

Source: Nathan Martin of the FedUpUSA, March 20, 2010 (hat tip: The King Report).

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Chris

March 25, 2010 at 4:52 pm

Intuitively, the point would seem to be valid (diminishing marginal productivity of debt). The chart does indeed show that on a secular basis, debt has risen faster than has GDP. However, I don’t think the relationship can be quantified quite so neatly. GDP is impacted by other factors besides changing debt levels. So is it a case where debt is less “productive” or are other factors also at work? Tell me what I’m missing here.

Richard

March 26, 2010 at 12:59 am

What on earth do you mean by ‘did you enjoy this post?’
It is absolutely frightening

Fred

March 26, 2010 at 7:52 am

Got silver and gold? The ‘dollar’ is burnt toast!

Roy

March 26, 2010 at 8:00 am

Ok, so we’ve hit saturation, and still we’re adding debt (and at a stunning rate)…

what happens next?

China

March 26, 2010 at 11:35 am

Can we see the chart for China? It could be very interesting.

Jackal

March 26, 2010 at 1:35 pm

If this situation is a “given”, what is the future of gold and silver in terms of prices?

Val

March 26, 2010 at 6:20 pm

It would be enlightening to see comparable graph for USA at end of WWII. I understand debt/GDP was high (very dangerous), but the country survived (after that recession). What about similar graphs for France and UK ?

Dolf

March 26, 2010 at 11:46 pm

This a facinating graph. I think we have to specify GDP more accurately. Companies are making profits, profits are reinvested. However, a part of said profits will flow into the pockets of the richer part of our society. That money is partly or not used and has no contribution to the GDP. The devopment of the richer part of our society is enormous during the past years.

uss?

March 27, 2010 at 12:12 am

Total US debt to GDP at the end of World War II was below 60% of GDP and the beginning of the credit cycle.

March 30, 2010 at 5:53 am

Dolf,
The rich do invest that money back in order to make more profits, so yes it does contribute to the GDP. When the government takes that money in the form of debt, however, it has to remove that money from the GDP at some point.

Art Ingalls

March 30, 2010 at 4:47 pm

History has shown all fiat currencies will eventually implode. In order to take back America, the money machine must be taken away. The U.S. Corporation is bankrupt. I am not responsible for that.

Cas Woodbridge

April 5, 2010 at 5:48 pm

What am I missing? The ordinate of the graph seems to be a ratio of dollar amounts, so the ratio is dimensionless, BUT the numbers along the ordinate are given in dollars ($).