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I know Krugman is wrong…but why is he?

While watching some Steve Keen interviews, I was struck by something. I have known for a long time that mainstream economists pay no attention what so ever to private sector debt levels. I never really dug into why. But Keen specifically touched on this, and stated that NeoClassical economists think private debt levels, vs. GDP, or any other metric, do not matter. To them, it all balances out, because someones debt service is someone else’s coupon. One persons debt, is another’s asset. As recently as LAST YEAR, that idiot Krugman argued in a research paper that private debt levels do not matter!

All you need to do is look at history, or read Kindleberger, to know, in your gut, that this is a monumental error. But where is the disconnect between the ivory tower theory of NeoClassical economics and the real world? How on earth, exactly, could all these mainstream economists get this so wrong?

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In case you are interested..here is the interview in question, with Keen.

“Progress Occurs one Funeral at a Time”

I think a primary reason is that once credit/debt levels get to a certain level, they can ONLY be used for speculation on rising asset prices…being bid up by credit. In other words, the NeoClassical economists ARE correct…only so long as debt is being used for investment in capital goods, means of production, etc. Once you get to the point where you do not need any more productive capacity, there is nothing left for the credit/debt to do, except bid up asset prices…which leads to manias. A primary characteristic of manias is that the asset prices disconnect from their underlying income generating capability. THAT is why private sector debt levels matter. When they are sky high…it can only be in the present of some dramatic over valuation of assets relative to their underlying capability. This leads to a pretty basic thesis…

Once debt levels get to a certain point…there IS a bubble SOMEWHERE.

Curious what you think of my little theory on what people like Krugman don’t get…

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