The Cycle of Falling Interest

Over the past few weeks, we have looked at the effects of falling interest rates: falling discount applied to future cash flows (and hence rising stock and bond prices), and especially falling marginal productivity of debt (MPoD). Falling MPoD means that we get less and less GDP ‘juice’ for each new dollar of borrowing ‘squeeze’.
Last week, we proposed an economic law: if MPoD < 1 then the economy is unsustainable.
MPoD has been falling since at least 1950, and is currently well under 0.4 (having had a temporary boost in the wake of the crisis of 2008). 0.4 means a new borrowed dollar adds 40 cents to GDP.
Under irredeemable paper currency, debt cannot be extinguished. So that dollar of debt – which bought a shrinking and temporary shot of GDP – lingers forever in the system. That is the very meaning of the word irredeemable.
This is one reason why MPoD is falling. Each time that a bond is rolled, the amount is increased by the accumulated interest. This incremental debt is not productive and does not add to GDP. And also, all that debt accumulated over many decades has to be serviced, which reduces debtors’ capacity to borrow for productive purposes.
And this leads us to a discussion of the trend of falling interest. Has the cause ceased? Have we, as many say, entered a new era of rising rates? Does the Fed have the power to make it so? Is there going to be a resurgence of inflation?

This post was published at GoldSeek on Monday, 13 November 2017.