...Lacy showed how, in a world of falling monetary velocity, the amount of GDP growth produced by each additional dollar of debt fell 24% in the last 20 years. That’s why we have so much more debt now and yet slower growth....
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bb. Two issues: (1) if interest rates are low, then the velocity of money is low because it doesn't earn much; (2) what if GDP isn't being measured correctly - and/or we are investing with new products and such disruption, that GDP (assets, goods and services, cycle out-of-use with quick replacement? NOT ALL IS AS SIMPLE OR OBVIOUS as it may seem.
Thought experiment: If Italy were to remove itself from the euro and reissue the lira, does anybody really think that Italy would keep today’s low rates? Ditto for Greece and other countries. Left on their own, these currencies would devalue relative to stronger ones like Germany, and their interest rates would rise.
This is not necessarily a bad thing. The “safety valves” of currency devaluation and bond market vigilantes saved Italy numerous times before it joined the euro. What most people don’t realize is that Italy grew faster than Germany in real terms for the 20–30 years prior to joining the euro, despite its inflation and devaluations.
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