The Dynamics of Debt

Having studied economics for four years, I have little use for most economists. Today, such skepticism is widely-shared – after these “experts” displayed their lack of comprehension for all the world to see. Apart from a handful of economists (generally all rebels against current, economic dogma), this entire community showed itself incapable of even seeing the largest asset-bubble in history – let alone understanding the consequences of that bursting bubble.

In my case, my lack of confidence in these “experts” dates all the way back to the 1980′s, when I was studying economics. I was both frustrated and mystified that it was impossible to engage these people in “real world” debates – since the economics professors I studied under were simply incapable of recognizing anything that was not included and explained by their economic “models”.

This strikes at the core of the failings of economics: its dependency on models. The desire to construct economic models of market behavior and analysis is understandable: a good model can be a powerful forecasting tool for the future. The problem is that every economic model is based upon a long list of assumptions. In every case, some of these assumptions are dubious, while others are simply ridiculous.

Modern economics is based upon the theories and models of “neoclassical” economists. Often they are simply referred to as “Keynesians” – in recognition of the hero of neoclassical theory, John Keynes. Critics of these ivory-tower academics (like myself) disparagingly refer to the slogan of such economists as “deficits don’t matter”. However, what I didn’t truly understand previously is that this mantra actually understates the gross deficiencies of this “school” of economics.

Once again, I tip my hat to economist, Steve Keen – whose Debtwatch blog I have referred to in the past. Though his own name bears a great similarity to the icon of neoclassical economics, Dr. Keen is a harsh critic of Keynes. This is because Dr. Keen is among the minority of economists who reject neoclassical theory in favor of a branch of economics generally associated with the Austrian School of economics – with the most acclaimed theorist of this camp being Ludwig von Mises. More recently, this branch of economics was championed by Hyman Minsky.

Rejecting neoclassical theory doesn’t require an economics degree, or any economics training at all. Any child who has mastered the fundamentals of arithmetic can point out the absurdity of the assertion that “deficits don’t matter”. As deficits are piled atop each other, year after year, the simple addition of these debts (along with their compounding interest payments) will inevitably reach a point where the costs of servicing this debt become so large that it becomes impossible for an economy to grow any further – as too large a percentage of total resources becomes consumed through interest payments on debt (with none of the “principal” ever being repaid).

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