Monetary Theory Article - The Marginal Productivity of Debt (Fekete)

[Beet]

This is Mr gold backwardation means physical gold would be unavailable for delivery by now.

'Well, they don’t believe that the physical gold will be there and available for
delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is
useless for their purposes of capital preservation.

December 2 is a landmark, because before that date the monetary system could
have been saved by opening the U.S. Mint to gold. Now, given the fact of gold
backwardation, it is too late. The last chance to avoid disaster has been missed.
The proverbial last straw has broken the back of the camel.'

- Fekete last December.

1. Through what mechanism does the marginal productivity of debt decline and through what measure was that level said to reach zero in 2006?

2. Since the nominal interest rates will never fall (substantially) below zero, how can it be that interest rates will continue to fall in a delfationary environment? The more deflation, the higher the real interest rate is.

[Beet]

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Yes, this is nothing radical. I expect much of the same- as long as more new debt goes on the market, the Fed will have to buy more to keep yields from rising. Of course, under a perfect competition equilibrium market, the Fed's actions ought to have no effect on yields. The Fed's effect on yields is solely due to the proportional decrease in total supply of bonds relative to dollars the Fed's action is supposed to have.