Thursday, March 25, 2010

Picture du Jour: Welcome to debt Saturation

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!

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