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The Falling Productivity of Debt

Discounting the Present Value of Future Income

Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.

We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article). This is a very simple ratio chart, which focuses on non-financial corporate debt in particular, as neither consumer debt nor government debt can be considered “productive” by their very nature – the latter types of debt are used for consumption, which they “pull forward” (as an aside, we don’t believe there is anything wrong with consumer debt per se, but it is not “productive”). As the recommendations of Keynesians on combating economic downturns indicate, they have a slight problem with the sequencing of production and consumption. They favor measures aimed at boosting demand, i.e., they want to encourage consumption, which is tantamount to putting the cart before the horse. The chart above shows the ratio of GDP to total non-financial corporate debt – and obviously, GDP is not really an ideal measure for this purpose, as Keith also mentions below (GDP has many flaws, and its greatest flaw is the underlying idea that “spending” is what drives economic growth; not to mention that it seems not to matter what the spending actually entails – even Keynesian ditch digging or pyramid building would “add to GDP”, but would it represent economic growth? That seems a rather audacious assumption – in fact, it should be obvious that such activities would diminish rather than enhance society-wide prosperity).

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