Al Gore Won a Nobel too!

So Paul Krugman won a Nobel prize.

Mr. Krugman subscribes to the Keynesian notion that consumption determines output. He posits that classical and Austrian Economics, which essentially state that capital investment determines output, are flawed in that they cannot explain why there would be unemployment as a result of malinvestment. He argues that it should not matter whether income is spent on consumption goods or capital goods, that a dollar spent is a dollar earned.

Now I'm obviously no Nobel Laureate, but here's my explanation:

1) Consumption goods are created with factors of production. Namely, labor and capital stock (factories, equipment and infrastructure).
2) Creating capital requires foregoing consumption, otherwise known as "saving".
3) Capital depreciates, and therefore must be replaced with an investment of savings.
4) If incomes are diverted from savings to consumption or speculative activities, capital investment will not replace the capital stock and the capital stock will shrink.
5) Shrinking capital stock must, at some point, cause falling output.
6) Falling output must manifest itself in one of two ways: 1) falling real wages or 2) unemployment.

Krugman seems to believe that either a) capital does not depreciate or b) consumption need not equate to output. Are either of these assumptions realistic? I suppose if you relaxe the notion of diminishing marginal returns and infinite inventories.

Is there another explanation?