Mike Shedlock tackles Paul Krugman and the Greenspan Contrarian Indicator


What economists like Paul Krugman, Ben Bernanke and others fail to recognize, is that there is a reason why the private sector is not spending, which has nothing to do with an elaborate, psychological feed-back loop. It is true that negative future expectations do reinforce a negative trend, but at some point, that trend DOES HAVE to reverse. A bottom WILL form, and from that point the economy rebounds. So what then, is preventing the bottom from forming? Enter, that four letter word, D-E-B-T. The reason that the economy cannot recover, and the reason that the private sector is not spending, is because it is in the process of deleveraging from a debt binge that has gone on, arguably, for almost 4 decades in the US, and with a bit more variation in Europe.

The problem is not a lack of demand. This is a symptom. The disease is a stock of nominal debt so large that it has created a negative drag on the economy. Attempting to carry this debt, i.e. not defaulting on it or not forgiving it, is a path towards feudalism…towards serfdom. This is why we have bankruptcy laws for the private sector. The notion that this should not apply to government debt as well is bank propaganda.