A negative marginal productivity of debt means that incurring an additional dollar of debt leads to a decrease in the GDP.
As for why this occurs, think of the mounting interest payments. Eventually, the capital gained from taking on debt is completely wiped out by the increase in interest payment.
A company takes out a loan, expecting to pay the interest from revenues that stem from the expansion of their business. Instead, the company has so much debt that the expansion of their business doesn’t even fully cover their interest payments. Now, they’re on the hook for even more interest payments without getting additional profitability from their larger business.
Taking on the additional debt has reduced their overall profitability, thus the marginal profit of the debt was negative.
In the macroscopic case for the U.S., replace “profit” with “production”. The idea is still the same.
The marginal productivity of debt is negative, because taking on additional debt reduces the GDP. It reduces the GDP because the increase in interest payments due to the debt outweigh the increase in production due to the debt.
To which the only solution is to crank up the printing press and print money by the metric ton and pay off debts with a devalued dollar. I suspect this was the plan all along, which could actually work, but it is a risky bet with huge consequences if it fails.
The key with this forced inflation is to get the money to the public at large. That’s tricky because everybody pretty much would have to get substantial cost of living increases pretty much simultaneously. This will in turn require more governement intervention and the vicious cycle continues.
I am not fond of this model, but if it does in fact work, I will be much, much richer. The price of failure is the entire country on it’s knees economically for a loooong time. The second part scares me, really.
I severely doubt the long-term stability of the Keynesian model because the idea that our debtors will not recognize that we’re attempting to pay them with worthless dollars and will not call in their T-Bills while they’re still worth something is ridiculous. Once that happens, the party’s over.
The only reason China hasn’t already wrecked us by calling them in is because they need our demand more than they need us to get out of their way. But first, that will not be the case forever. Second, China is not stupid, and they will pull the trigger on us before they’re ready instead of watching their receivables vanish.
To think that we can win this game of chicken is outrageous.[/quote]
Stability is an issue as well…If you forcibly devalue the dollar you may not be able to stop the bleeding.
Putting your fate in the hands of your enemy is always a bad idea. China is no friend of ours and they will turn on us in a second.