Or in other words, Paul Krugman discovers debt. On May 12 of 2012, Paul Krugman confessed that he had no idea what Steve Keen was talking about with regards to how debt deflation reduces demand:
“Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand.” (Minsky and Methodology (Wonkish), March 27, 2012)
However, it has become so obvious that without growing debt, people cannot afford to pay for things, (thereby reducing demand), that even Paul Krugman has finally noticed, Neo-Keynesian models of exogenous debt be damned. But, as is his wont, Krugman pretends to have known this all along:
“Start with the point I’ve raised several times, and others have raised as well: underneath the apparent stability of the Great Moderation lurked a rapid rise in debt that is now being unwound … Debt was rising by around 2 per cent of GDP annually; that’s not going to happen in future, which a naïve calculation suggests means a reduction in demand, other things equal, of around 2 percent of GDP.” (Secular Stagnation Arithmetic, December 7, 2013)
And notice his comment about debt rising by around two percent of GDP annually; is he finally paying attention to L1 only 11 years after I first warned about it? This is an astonishing development and may represent the first big cracks in the epic Keynesian wall of delusion concerning the exogenous, and therefore innocuous, nature of domestic debt.
In RGD, I demonstrated that debt not only effects demand, but prices as well. That’s why we can be certain that housing prices will not recover anytime soon and college tuitions cannot continue to rise, as their elevated price levels are almost entirely the result of the post-2001 explosion of easy credit. In fact, I even explained the connection between debt and demand in my proposed modification of the core mechanism of the Austrian Business Cycle on a post entitled The Limits of Demand back in June 2009:
“I suggest the cycle can be better understood if we broaden our
perspective when looking at the middle phase of the cycle and consider
how the expansion of bank credit will also lead to malinvestment for
reasons that are not dependent upon the shifting production ratio
between capital goods and consumer goods by utilizing a price-based
variant of the Keynesian acceleration principle. This begins with
recognizing the obvious causal connection between increased bank
credit and price distortions, since cheap credit permits consumers to
purchase goods at prices they could not otherwise have afforded; this is
what cheap credit is expected to do and is the reason loan
consolidations and other forms of consumer credit are advertised on
television. The easy availability of cheap credit permits the purchase
of houses, college tuitions, and cars by a much broader range of buyers
than would otherwise be the case, so as the law of supply and demand
dictates, an increase in the availability of debt will lead to an
increase in demand which will necessarily drive the price of those goods
being purchased by debt higher relative to the price of goods not being
purchased by debt.”
The converse of the bolded text is of course also true, hence my expectation of economic contraction following the debt-deflation as well as my observation of economic stagnation as a result of the current debt-disinflation. But then, I don’t have a Nobel Prize or anything.