Thanks to Christopher Rupe for his graph here that depicts that nominal GDP increases have been slowing in relation to new debt in the U.S. economy. Debt is apparently being used to finance consumption and/or going toward capital investments that are providing lower and lower returns. Hence, government fiscal and monetary stimulus, both of which use debt as a stimulus, are closing in on a zero effect on GDP.

At that point what happens? The debt overhang strangles the economy. One way out is debt repudiation by borrowers, that is, defaults and bankruptcies in the private sector and a big depression that cleans out the debt. The government doesn’t want this and is intent on preventing it. This prolongs the depression as it did in Japan.

As national income falls, the government will find that its outlays vastly exceed its revenues. Its borrowing costs will soar. It can, as one choice, default or repudiate its own debt. It doesn’t want to do that, although it is one of the only better choices that would also help restore a healthy economy. (I’ve re-thought my position on this one.) Instead the government may choose one or more of several other horrible paths. They include hyperinflation, incomes policies, capital controls, trade barriers, and seizures of pension and retirement plan assets. The government will want to get wealth any way it can so as to provide “bread” for the unemployed who will mount in numbers. The Democratic administration in place is ready to enact programs like these anyway, even before this depression gets worse.