'..the higher the level of debt the greater the restraint on economic growth.'

'While many believe that surging debt will boost economic growth, the law of diminishing returns indicates that extreme indebtedness will impede economic growth and ultimately result in economic decline.'

'The Debt End Game - The Law of Diminishing Returns

The economic impact of this explosion in debt has been analyzed through a plethora of academic articles. The most germane might be the Checherita and Rother 2010 study which shows that excessive indebtedness is deleterious for economic growth in a non-linear fashion. That is, the higher the level of debt the greater the restraint on economic growth.

While many believe that surging debt will boost economic growth, the law of diminishing returns indicates that extreme indebtedness will impede economic growth and ultimately result in economic decline. Diminishing returns is about economic growth and thus highly important in economics since the standard of living cannot be raised without increasing output. The application of diminishing returns means a disproportionate growth in debt will produce similar results for all countries in extreme debt, regardless of their idiosyncratic conditions. Thus, no matter how U.S., Japanese, Chinese, European or emerging market debt is financed or owned, and regardless of the economic system, the path is stagnation and then decline. Even central bank funding of debt will not negate diminishing returns. (p. 4)

..

The law of diminishing returns holds important implications for both recent and future fiscal policy actions that have increased, and will continue to increase, federal debt. Suppose that during the next recession the economic solution is assumed to be an even more massive rise in debt than the $3.5 trillion explosion that occurred during and after the recession of 2008-09. This policy will result in even smaller economic gains than in the current expansion. If debt increases are doubled, tripled, or even quadrupled, the law of diminishing returns indicates economic growth will become even more frail.

..

Important to the long-term investor is the pernicious impact of exploding debt levels. This condition will slow economic growth, and the resulting poor economic conditions will lead to lower inflation and thereby lower long-term interest rates. This suggests that high quality yields may be difficult to obtain within the next decade. In the shorter run, in accordance with Friedman’s established theory, the current monetary deceleration, or restrictive monetary policy, will bring about lower long-term interest rates.' (p. 5)

- Lacy H. Hunt, Ph.D, Quarterly Review and Outlook First Quarter 2018



Context

'..the next financial tremors will come from corporate debt.'

'..monetary knowledge .. of currency reform under difficult conditions you have to go to Carl Menger.'

'Ten-years of ultra-loose global finance destroyed discipline - by borrowers and lenders alike.'