Debt Bomb

Steven Gjerstad and Vernon L. Smith argue that the “events of the past 10 years have an eerie similarity to the period leading up to the Great Depression.” More specifically, their argument is that contrary to the usual explanation that the troubles in the banking sector during the Great Depression were caused by stock-market speculation and a monetary contraction, they suggest that “both the Great Depression and the current crisis had their origins in excessive consumer debt — especially mortgage debt”:

via Economist’s View: “From Bubble to Depression?”.

This is not the first time this view has surfaced. Some economists in the 1930s also viewed excessive debt as the cause of the Depression. The idea never developed because of the infatuation with the novel ideas of Lord Keynes.

If Gjerstad and Smith, as well as their predecessors, are right, then the current notions about stimulus packages increasing demand are almost totally bogus. The “debt bomb” view makes more sense to me than “animal spirits” or monetary contraction. This does not foretell a happy future. The debt bomb will be paid, if not by the debtors, then by the taxpayers. Regardless of how it sorts out, most of us will be faced with a lower standard of living than we would otherwise have. And misguided government action can make things even worse.

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