THE MARGINAL PRODUCTIVITY OF DEBT

My own theory, relying on the concept of marginal productivity of debt, predicts that it is not hyperinflation but a vicious deflation which is in store. Here is the argument.

While prices of primary products such as crude oil and foodstuffs may initially rise, there is no purchasing power in the hands of the consumers, nor can they borrow as they used to in order to pay the higher prices much as though they would have liked to do. The newly created money has gone into bailing out banks, and much of it was diverted to continue paying bloated bonuses to bankers. Very little, if any of it has "trickled down" to the ordinary consumers who are squeezed relentlessly on their debts contracted in the past.

It follows that price rises are unsustainable, as the consumer is unable to pay them. As a consequence the retail and wholesale merchants are also squeezed. They have to retrench. Pressure from vanishing demand is passed on further to the producers who have to retrench as well. All of them are experiencing an ebb in their operating cash flow. They lay off more people, aggravating the crisis further as cash in the hand of the consumers is diminished even more through increased unemployment. The vicious spiral is on.

Key quote: Bernanke can create all the money he wants and more, but he cannot make it flow uphill.

If all the money the Fed is injecting into the banks flows into the economy, we will see hyper-inflation. A more likely scenario is that the money will not flow because consumers will refuse to borrow and spend and we will see a hyper-depression. This is the dangerous game the Fed is playing. We know this is all just as dull as dishwater but present it anyway for your perusal.