Recently, two fascinating admissions were made by two of America’s
most well-known economists. The first was made by Paul Krugman, the New
York Times columnist and Nobel Prize-winner, who has, as a good
Neo-Keynesian, resolutely denied any possible link between the amount of
debt in the economy and the level of demand for goods and services. As
recently as March 2012, he was following Paul Samuelson’s literally
textbook lead concerning the economically innocuous nature of debt and
admitting “I guess I don’t get that at all.” But two weeks ago, he suddenly began singing a completely different tune.
In the fall of 2002, I observed the housing bubble and noted its
likely consequences for the future. In the spring of 2008, I warned my
readers that the consequences of that bubble were about to erupt, which
duly happened six months later, in October. What was it that concerned
me about the situation? And how was I able to see the problem coming
when so many mainstream economists did not?
The reason is simple. Mainstream economists, whether of the neo-Keynesian or the Monetarist variety, believe that debt is, in their words, “exogenous to the system”.