Very Disturbing

Source: Karl Denninger's Blog "Market Ticker"

Graph originally produced by Barry Bannister

What If Return On Debt Goes Negative?

In finance we like to consider return on assets and return on equity as measures of financial productivity. The preceding graph considers return on debt as a measure of quality of new debt.

As can be clearly seen, productivity of new debt fell below 1 in the 1960s. It has taken increasing amounts of new debt to create a dollar of GDP growth. We are about to (or have already) crossed a threshold to negative returns on new debt.

To state it a different way:

Say a farmer plants 100 acres into wheat at the rate of 1.5 bushels per acre.

Total wheat seeded = 150 bushels.

He then harvests the wheat in the fall and it yields 45 bushels per acre.

Total wheat harvested = 4500 bushels.

Return on a bushel of wheat in this example is 30:1

This is an example of a productive "economy" similar to the 1940s and 1950s.

If the same farmer seeds his 100 acres to wheat and instead harvests 150 bushels of wheat, we have a break even "economy". 1:1 ratio of inputs to outputs.

This is the economy of the mid 1960s.

If the same farmer seed his 100 acres to wheat and instead harvests 15 bushels of wheat, we have the economy of today where we borrow from future harvests to continue to consume today. The ratio is 1 to 0.1 inputs to outputs, or 10 cents on the dollar.

The economy of tomorrow is even worse. It is where the return to the economy goes negative. The farmer in our example has a total crop failure. He plants 150 bushels of wheat that he borrowed from a neighbor and receives nothing.

This is the zero hour. The economy stops.

We need a monetary reformation.

A good link that relates to this is from George Washington's Blog. Be sure to watch the video.