The fraud of bankster capitalism

I am all in favor of a free market capitalistic system, but we have not had such a system since at least 1971 when Nixon took the dollar off the gold standard.  I'm not saying everything was fine before then, but this is when what I call "bankster capitalism" took over.

The justification for debt is that it will increase your ability to earn more in the future.  Thus student loans theoretically improve one's ability to earn future income with a degree.  A mortgage on a house will allow one to earn equity as the price rises.  Well, I believe that debt can only rarely improve future income as a whole.  The way to look at this is to compare the increase of income to the increase in debt as a ratio.  I call this the "Marginal Utility of Debt".  If this is over 1, then debt actually increased income.  If this is less than 1, then you are going deeper in debt without having an increased ability to pay.

Since 1980, this number has been greater than 1 only once, in the first quarter of 1981.  In the first quarter of 1984, the ratio was 0.65.  Also in the 2nd quarter of 2000 it hit 0.65. It has never been higher than this since.  Much more common than this are negative correlations, where an increase in debt is accompanied by a decrease in GDP, or where GDP increases even though debt decreases.  This reached an extreme in the 2nd quarter of 2011 where GDP increased 188, but Debt decreased by 20, leading to  ratio of -9.2.  See the following chart:

So what's my point.  The system is saturated with debt and has been since at least 1980.  More debt does not help the situation.  Almost none of the debt that currently exists today will actually be paid off, instead it will just be rolled over indefinitely until it defaults.

I was thinking that things will return to "normal" in about 2016 when interest rates rise.  But why should interest rates ever rise?  Instead it is a struggle to keep them above zero.  Most debt today is non-productive, even if the payments on it are current.  I think we have already reached the end game, and we are now in "zombie" mode, just like Japan.  We will be stuck in this mode forever until people realize the fraud and abandon the dollar and all dollar-denominated debt defaults. 

The government is trying to reinflate the system by issuing more debt.  But this merely keeps it on life support.  The patient will never recover; instead he is a zombie, a dead man who appears to be living.

The solution, if I was in charge?  Immediately cut government spending enough so the budget balances and so there is even a small surplus.  This will unfortunately throw many people out of work.  Slowly pay off the debt.  Allow massive defaults and bankruptcies until real estate resets at 1980 levels, adjusted for inflation.  Then when we have reached equilibrium, make a new system that does not rely on debt for growth.  But this will never happen because the banksters are in charge, and our leaders are beholden to them. 

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Update:  Here is another article that says the same thing (without the same conclusion).

The Failure of Debt-Leveraged Faux "Growth".

Source:  http://market-ticker.org/akcs-www?post=219086

The green line shows sustainable growth, which was positive only in 3 quarters from 3rd quarter 2009 to 1st quater 2010. 

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Here is another chart showing the diminishing marginal utility of debt from a couple of years ago:

Source: http://economicedge.blogspot.com/2010/04/guest-post-and-more-on-most-important.html

Note that this has never been greater than $1.00. This shows that the marginal utility will actually go negative.  I don't believe this, but I think the marginal utility will bounce around the $.10 to $.20 line.