THE BLOG

Reduce Debt -- or Face Deflationary Depression

06/14/2011 01:03 pm ET | Updated Aug 14, 2011

MPD -- the marginal productivity of debt -- all debt that is consumer, corporate and government -- is producing less and less of national income -- wages, profits,and interest income. MPD is suffocating GDP. For decades every new dollar of debt "has created incrementally less and less national income and economic activity," says Ron Robins, the author of the Enlightened Economics blog.

Here are the numbers that put the ogre of MPD squarely in the forefront of the political showdown over the potential debt default. This is called the debt productivity decline. An economic concept that should get squarely in your consciousness. In 1957 there was only $1.86 of debt for each $1.00 of net national income. But, by 2006 it required $4.60 of debt to create $1.00 of national income. That means the extra $2.74 of debt per dollar produced NO national income.

This relationship is especially threatening to the US economy because of the $4 trillion in government debt that was issued in the past 3 years. This $4 trillion only produced GDP of $1.5 trillion. This means that $1.00 in current borrowing only produced less than 50 cents in new economic activity. Even more seriously, it means that $1.00 in new borrowing only produced 8 cents in new federal tax revenues.

Enlightened Economics reckons we must reduce spending big-time -- before we even think of increasing taxes. Or else we may face a "'deflationary depression." Very low interest rates for an extended period of time and very low economic activity, and much higher unemployment.

A disaster scenario that must be avoided at all costs. All costs means paying the price of reducing the amount of debt outstanding. This is all debt-consumer, corporate and government. Household debt has been on the right track southward. Now, it is government's turn. There is no other alternative.

Mr. Robins regards "gold as the barometer of ethics concerning how well our financial system is managed." He has been buying gold mining shares since 1999 and believes the precious metal will go higher as the amount of fiat money creation goes higher. He reckons Soros sold his gold in a trade, and could see the price slide down $200 an ounce to the $1,300 level with the end of QE2 and no immediate QE3. Gold mining shares have been lagging the price of gold for the past several months.

And if you don't want a deflationary depression write your Congressman about reducing the $14 trillion of government debt that is outstanding. It is not creating any meaningful economic activity and hardly any tax revenue.