Dedicated to the reform of economics
Debt as the central burden, the primary cause of stagnation across the globe and the deepening crises in many countries, is still ignored by the orthodoxy. American households and European population suffer from the madness of austerity delivered by TINA (there is no alternative), the fairy godmother of the financial sector, ratified by the pronouncements of orthodox economists.
The fundamental cause of the economic and financial crisis that began in late 2007 was lending by the finance sector that primarily financed speculation rather than investment. The private debt bubble this caused is unprecedented, probably in human history and certainly in the last century (see Figure 1). Its unwinding is the primary cause of the sustained slump in economic growth. The recent growth in sovereign debt is a symptom of this underlying crisis, not the cause, and the current political obsession with reducing sovereign debt will exacerbate the root problem of private sector deleveraging.
US private debt clearly rose faster than GDP from the end of World War II (when the debt to GDP ratio was 43%) until 2009 (when it peaked at nearly 200%), but there is no intrinsic reason why it (or the public sector debt to GDP ratio) has to rise over time.
The debt and asset price bubbles were ignored by conventional "Neoclassical" economists on the basis of a set of a priori beliefs about the nature of a market economy that are spurious, but deeply entrenched. Understanding how this crisis came about will require a new, dynamic, monetary approach to economic theory that contradicts the neat, plausible and false Neoclassical model that currently dominates academic economics and popular political debate.
Escaping from the debt trap we are now in will require either a "Lost Generation", or policies that run counter to conventional economic thought and the short-term interests of the financial sector.
Preventing a future crisis will require a redefinition of financial claims upon the real economy which eliminates the appeal of leveraged speculation.