This is exactly what's happening in the UK, as Johann Hari points out.
As a proportion of GDP, Britain’s national debt has been higher than it is now for 200 of the past 250 years. Read that sentence again. Check it on any graph by any historian. Since 1750, there have only been two brief 30-year periods when our debt has been lower than it is now. If we are “bust” today, as George Osborne has claimed, then we have almost always been bust. We were bust when we pioneered the Industrial Revolution. We were bust when we ruled a quarter of the world. We were bust when we beat the Nazis. We were bust when we built the NHS. Or is it George Osborne’s economics that are bust?
Our debt is not high by historical standards, and it is not high by international standards. For example, Japan’s national debt is three times bigger than ours, and they are still borrowing at good rates.
David Cameron claims that, despite these facts, they need to cut our debt by slashing our spending because the bond markets demand it. If they do not obey, then our national credit rating will be downgraded, and we will have to pay much higher interest on our debt. But here’s the flaw in that plan. That’s not what the bond markets say. Not at all. Professor Paul Krugman, the Nobel Prize-winning economist whose predictions have consistently proved right through this crisis, says Cameron is conjuring up “invisible bond vigilantes” who “don’t exist.” Who is the bond market really punishing? It’s the countries that cut too fast, and so kill their economic growth. The last two nations to be down-graded were Ireland and Spain, who followed Cameron’s script to the letter.
The irony is that in this case, it was the utter failure of capitalism which brought about the catastrophe and ushered in the medicine of… free-market capitalism.
I think I'm starting to understand where it went wrong now.