In his December 29^th column in the New York Times, Keynes Was Right, he continues to make the case that the only reason we haven’t come roaring out of the Great Recession is because we spent too little.

Krugman cites the downturn of 1937 when FDR’s government programs were curtailed and unemployment rose. He says that unlike in that fateful year we should instead redouble our efforts and spend more to prime the economic pump. Austerity is insanity he says. We must spend more as Keynes would have advised, deficits (and inflation) be damned.

Build pyramids as Keynes said we should. So what if the they do not contribute, and probably detract, from the quality of the economy. It is the quantity of economic activity that we are interested in not quality. Get people employed doing whatever. This is the road to prosperity!

Interestingly the Chinese employed this philosophy over the past 3 years by building the modern equivalent of pyramids all over their country. Through various means money was poured into the hinterlands from central managing authorities to regional managing authorities, to local managing authorities. The result has been the creation of a vast archipelago of empty cities.

I’m not kidding. There are cities with no one in them, completely constructed and rotting away empty. As I have said before, it takes some serious economic incompetence to create cities where no one lives, in a country of 1.3 billion people.

But this is Krugman’s prescription for economic success. In relative terms the size of the Chinese stimulus in 2008 was twice as large as the American one and happened over half the time. That should have done the trick right Mr. Krugman? Or perhaps the Chinese did not spend enough?

Krugman doesn’t seem to understand one of the fundamental lessons every good stock broker learns in his or her first year on the job. Trees do not grow to the sky. Everything reverts to the mean, including economies.

The further an economy is pushed beyond it’s natural trajectory (via stimulus etc) which in a healthy economy is determined by the creativity, ingenuity, and shrewdness of its individual participants, the worse the pain when the economy reverts back to it’s natural state.

Stimulus is like steroids for the economy. One can inject only so much until the patient either falls over from the unnatural weight and physical stress to the system or goes insane.

When are we supposed to go back to some semblance of an economy based on reality Mr. Krugman? It appears that his response is – never.

I fear an entire globe going into a fit of economic “roid rage” at the same time. Yet this will be the end result if we continue to follow the Krugman/Keynesian line of economic reasoning. We must stop now.

Perhaps the most surprising revelation in the video, at least to everyone other than economic historians, is that America suffered a harsh depression after World War I, with GDP falling by a staggering 24 percent.

But we don’t read much about that downturn in the history books, in large part because it ended so quickly.

The key question, though, is why did that depression end quickly while the Great Depression dragged on for a decade?

One big reason for the different results is that markets were largely left unmolested in the 1920s. This meant resources could be quickly redeployed, minimizing the downturn.

But this doesn’t mean the crowd in Washington was completely passive. They did do something to help the economy recover. As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending.

But as the crisis waned and the “Great Recession” began, governments and their central banks continued to pour wave after wave of Keynesian deficit spending and money printing. With economic activity about to slow and austerity shrinking excess government spending, the citizens of the world are about to be rewarded for their trust in government with a steep recession coupled with high levels of inflation. Economists refer to this witch’s brew of escalating misery as stagflation.

The U.S. Federal Reserve, European Central Bank, Bank of Japan, and other central banks around the world expanded money supplies by purchasing $2.5 trillion of sovereign debt and distressed banking assets to stem the risk of a deflationary spiral; from this, resultant lower wages and higher unemployment led to a self-reinforcing decline in global consumption.

The Congressional election sweep of 2008 launched a new political consensus that catapulted 2009 to 2011 at the largest deficit spending percentage increase since the Great Depression. What started out as a Keynesian an emergency economic rescue soon morphed into a permanent higher level of government spending and central bank money printing. But in a contradiction to the theory of Keynesian economics; this bold government intervention failed to generate economic growth and instead propelled global food and basic commodity inflation.

Bazaar levels of indebtedness and unwillingness to curtail spending has recently sparked a new European sovereign debt and bank insolvency crisis focusing on Portugal, Italy, Greece, and Spain. Germany, the only country to not implement Keynesian stimulus, is being asked as lender-of last-resort to bail out these countries, who are often grouped together with the acronym PIGS. The Teutonic tough love demanded by the Germans to rescue Greece is slashing public jobs equivalent to 20% of national employment and a decade-long economic squeeze on the consumer and corporate sectors that will shrivel the nation’s standard-of-living by 1/3rd.

U.S. counter-Keynesian revolutionaries were swept into political power in January of 2011 on a mandate to banish deficit spending. The recent debt-ceiling compromise will slash $71 billion of spending this fiscal year. Add in the expiration of incentives, such as the 100% depreciation of capital purchases in 2011, plus the impact of continued fiscal tightening, and America’s GDP will wither next year by 2%, or $300 billion. Getting government out of the economy will lead to big private sector growth in the future, but the transitional slowdown and spending austerity will lead to a nasty recession in the first half of 2012.

China, who benefited enormously by pegging their exchange rate to the U.S. dollar, has continued to stimulate their export economy by subsidizing state-owned-enterprises’ commodity purchases and directing banks to loan at 2% borrowing costs. The result has been strong employment and flooding the world with products sold under their production cost. The dark side is the 15% inflation for consumer food and rent currently ravaging workers plus increasingly insolvent banks. As anger builds, China will be forced to reduce the subsidies and allow export prices to rise. To the world, this will generate a burst of inflation.

Governments have had great fun spending lots of borrowed money on their friends and allies. When recession began to cure over-leveraged consumers from speculating in houses, government used the pain of households de-leveraging as a green light to maximize spending. After three years of record expenditures, governments have become sub-prime and are now being forced to de-leverage. But the tsunami of government money is still sloshing around in the world economies and will continue to drive inflation of basic commodity prices higher.

This blend of government austerity with expiring tax incentives will soon pull the U.S. economy down, and the world’s economy will follow. With our pre-recession Misery Index of 3.9% inflation and 9% unemployment already at the highest reading since Jimmy Carter in the 1970s, stirring in a severe recession will drive unemployment higher and make this witch’s brew boil.

Feel free to forward this Op Ed and follow our blog at ChrissStreetAndCompany.com. Chriss Street’s latest book, “The Third Way,” is now available on Amazon. If you would like to order a signed copy, contact The Forum Press.

Sort of makes sense, doesn’t it?

Well apparently it seemed a bit stingy for President Clinton and the Republicans in Congress in 1999. We have Senator Phil Gramm and Representative Jim Leach to thank for that one. Here’s the problem: The heads of big banks have this terrible habit of thinking that they’re the smartest guys in the room. Anyone who doesn’t believe that need only watch Ben Bernanke talk for more than 30 seconds. Actually, let’s refine that a bit. The problem isn’t that banking executives think they’re savants, the real problem is that they aren’t.

In the modern financial age, a lot of very highly paid guys with impressive titles who look at way too many numbers and think they make sense have concocted some very complex “hedging” strategies for “managing risk.” They think they understand the crafty derivatives they’ve invented – which are completely unregulated and totally opaque – and all the counterparty risk involved. They don’t, and therein lies the rub.

Mark Twain once said “It’s not what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Truth be told, what bankers are doing wouldn’t be so bad if they were the only ones who suffered from their own idiocy. Enter Congressmen Gramm, Leach, President Clinton, then President Bush (II), hammerin’ Hank Paulson, and Bernanke. It’s not just that banks are using complicated models that they don’t understand to speculate on securities they think they comprehend but don’t, they’re now doing it with client money. Starting to get the picture?

The end of October brought with it a new addition to the top 10 biggest bankruptcies of all-time when MF Global went belly-up under the incredible leadership of ex-Goldman chief and New Jersey governor Jon Corzine. Yes, MF Global has been the subject of a good deal of headlines lately, but bear with us for a moment while we take a closer look and apply it to a growing — and scary – trend.

First, MF Global went bust in just about 3 days, making it the most recent victim in a string of failed financial firms that dates all the way back to Long-Term Capital Management in the late ‘90s. Of course, LTCM failed in just weeks as a result of the East Asian and Russian financial crises. Tack onto that list Bear Stearns, which failed in a weekend, as did Lehman Brothers, along with a number of highly leveraged hedge funds. What we find is that, when it comes to banks and other financial institutions, there is rarely a slow decline. The bets they make are way too big and have way too much leverage. In other words, things are fine until they’re not. The line between the two is very fine, with success on one side and insolvency on the other. Again, that’s not the only problem — these companies are gambling with their clients’ money. When MF Global went bust, federal regulators found that hundreds of millions of client dollars had gone missing.

Unfortunately, many of these big banks learned their lesson in 2008, but it was the wrong lesson. What they learned is that no matter the dumb decisions they made, US taxpayers would make them whole. Ah, but how right Mark Twain was about what gets people in trouble! As we watch the trouble in Europe intensify and crappy derivatives floating to the surface of big bank balance sheets, we’re waiting for one or more of the big institutions to circle the drain. Those banks better be praying that if things go bad, they do so before January, 2013. Given the rhetoric of our presidential hopefuls, it’s a near-certainty that whoever is in the White House next won’t be helping to structure any bank bailouts. In fact, it’s not even certain that banks could get any help today if things went south. God help them if they end up asking for a bailout package that requires Congressional approval. Forget such a bill being DOA in the Senate, no spending bill will even be considered in the Boehner/Republican-led House – nor should it be.

Banks today desperately need to learn a different lesson from the one they learned in 2008. It’s time they learned to do business in a smart and responsible way, or go broke. Americans would certainly help press the issue by urging Congress to reenact the Glass-Steagall Act. It kept the problems we now face at bay for roughly 7 decades and would go a long way in helping clean up banks.

My argument did not lack evidence, however, and I regarded the agreement of several different forms of evidence as an important element of the argument’s force. The evidence I adduced with regard to changes in the yield spreads for high-grade corporate bonds of differing maturities seemed to me both systematic and especially compelling, though not decisive because alternative explanations of those changes might be offered. (I considered several such explanations and rejected them as unpersuasive in one way or another.) Recently, in my application of the concept of regime uncertainty to help us understand better the persistent economic troubles since 2007, I again advanced several different kinds of evidence, including as before an analysis of changes in the yield curves for high-grade corporate bonds. This time, too, the evidence is consistent with the underlying argument.

Nevertheless, the argument scarcely gained widespread assent, and most analysts either ignored it completely or, like Paul Krugman, dismissed it as a fairy tale—in his view, the sort of wholly fictitious notion that would be peddled only by think-tank whores in the pay of Republican plutocrats. (I trust that everyone who knows me will see how closely I fit this template.)

Now, however, more respectable analysts than I have accepted the challenge of showing that regime uncertainty can be measured systematically and that the resulting index “shows U.S. policy uncertainty [is currently] at historically high levels.” This research has been been carried out by three analysts at two of the world’s preeminent research universities: Scott R. Baker and Nicholas Bloom at Stanford University and Steven J. Davis at the University of Chicago. I highly recommend that anyone interested in this matter read the October 5 summary of these analysts’ research published online by Bloomberg News.

Some highlights:

• A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised . . . shows U.S. policy uncertainty at historically high levels.

• We constructed our index by combining three types of information: the frequency of newspaper articles that refer to economic uncertainty and the role of policy, the number of federal tax code provisions set to expire in coming years, and the extent of disagreement among forecasters about future inflation and government spending.

• Our index shows prominent surges in policy uncertainty around the time of major elections, the outbreak of wars and after the Sept. 11 attacks. It shows another surge after the bankruptcy of Lehman Brothers Holding Inc. in September 2008. Policy uncertainty has remained at high levels ever since.

• [T]he data refute the view that economic uncertainty necessarily breeds policy uncertainty. In the last decade, however, policy became a larger source of movements in overall economic uncertainty and an increasingly important concern for businesses and households. . . . [T]he persistence of policy uncertainty . . . reflects deliberate policy decisions, harmful rhetorical attacks on business and “millionaires,” failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship.

• To identify the drivers of policy uncertainty, we drilled into the Google News listings and quantified the factors at work. Several factors account for the high levels of policy uncertainty in 2010 and 2011, but monetary and tax issues predominate. Uncertainties related to health-care policy, labor regulations, national security and sovereign-debt concerns play contributing roles.

• Negative economic effects of uncertainty operate through multiple, reinforcing channels. When households are fearful about job loss, wages, taxes and retirement funds, they cut back on expenditures. The drop in consumer spending means weak sales for businesses and lower sales-tax collections for governments.

• When businesses are uncertain about taxes, health-care costs and regulatory initiatives, they adopt a cautious stance. Because it is costly to make a hiring or investment mistake, many companies will wait for calmer times to expand. If too many businesses wait, the recovery never takes off. Weak investments in capital goods, product development and worker training also undermine longer-run growth.

• So how much near-term improvement could we gain from a stable, certainty-enhancing policy regime? We estimate that restoring 2006 levels of policy uncertainty would yield an additional 2.5 million jobs over 18 months. Not a full solution to the jobs shortfall, but a big step in the right direction.

See the authors’ report for more detail.

The index constructed and analyzed by Baker, Bloom, and Davis, like any such index, may be faulted in various ways. Working with such data and the indexes constructed from them is a never-ending task of correction and refinement for empirical researchers. Nevertheless, these analysts have met the challenge of producing a systematically measured quantitative index of regime uncertainty (they call it policy uncertainty) over a long period, and they have presented reasonable arguments that tie the index’s movements to specific policy measures and future possibilities. Their evidence certainly deserves as much respect as the standard National Income and Product Accounts (NIPA) estimates prepared by the Commerce Department’s Bureau of Economic Analysis, much of which derives from highly questionable definitions and assumptions and from underlying data subject to a variety of errors—yet economists swallow the NIPA estimates all the time without choking.

The idea of regime uncertainty had sound economic theory and substantial empirical evidence to support it from the beginning, and a great deal of additional evidence has accumulated over the past three years. Yet critics have continued to dismiss it either as Republican bunk bought and paid for by Obama-hating billionaires or as a sort of “just so” story concocted by flaky think-tank nobodies, such as yours truly. Now, however, the research reported by Baker, Bloom, and Davis knocks the ball firmly back into the critics’ court. Don’t be surprised if they take a whack at it. Whether their attempt will succeed intellectually is another matter.

America is staring at economic disaster- Obamageddon. We are the Titanic, headed straight for the iceberg. Even delusional 500 point up days on Wall Street will not change the frightening long term picture. The iceberg is straight ahead.

Obama and his socialist cabal have channeled Hoover and FDR, who turned an ordinary bust into The Great Depression with a toxic strategy of more government, more spending, more debt, more entitlements, more rules and regulations strangling business, higher minimum wages, more power to unions, higher taxes, more printing of money by Fed, and trade tariffs. This is the Obama blueprint squared.

Here’s where the story gets downright frightening. This time the results are going to be dramatically worse than 1929. This time we are facing The Greatest Depression ever. Obamageddon.

Why? Because The Great Depression had NONE of problems and obligations we are now facing.

In 1929 America was not $100 trillion in debt and unfunded liabilities.

In 1929, most of our states were not bankrupt, insolvent and dependent on the federal government to survive. Entering the last Great Depression, California was not imitating Greece.

In 1929, we had far fewer government employees living off taxpayers. Today there are over 21 million federal, state and local government employees. Today 1 out of 5 federal employees earn over $100,000. 77,000 federal employees earn more than the Governors of their states. Government employees retire at age 50 with $100,000 pensions for life. The postal service – without competition- loses $8 billion annually. Protected by their unions and the politicians they elect, government employees are bankrupting America.

In 1929, Social Security, Medicare, and Medicaid didn’t exist. The federal government had no such obligations threatening to consume the entire federal budget within a few years.

In 1929, there was no such thing as welfare, food stamps, aid to dependent children, or English as a second language programs. American’s didn’t consider it the responsibility of government to pay for breakfast and lunch for school students – let alone illegal immigrants.

In 1929, we didn’t have millions of illegal immigrants and their children collecting billions of dollars in entitlements from U.S. taxpayers.

In 1929, legal immigrants wanted only to work. My grandparents from Russia and Germany received no government benefits. They worked day and night to provide for their family and become American citizens. It was sink or swim.

In 1929, we had 150 million citizens with a strong work ethic- all motivated to earn the American Dream for their children and grandchildren. Americans were hungry in 1929. Today the hungry, motivated citizens and entrepreneurs are in China and India.

In 1929, we had an education system that was the envy of the world. Today our public schools are in shambles. We spend the most in the world, and get among the worst results. The difference today? Teachers unions are in charge, instead of parents.

Our dumbed-down students are taught socialism and the great benefits of big government. They graduate with few skills, qualified only for low paying manufacturing jobs that no longer exist- they’ve been shipped to China and India. How will this hopeless, helpless, clueless workforce earn a living for the rest of their lives?

In 1929 taxes were much lower. Forget the tax rates- they were meaningless. In those days we had a cash economy, so most businesses paid little or no taxes. Sales and FICA taxes didn’t exist. Today the combined local, state, property, gas, sales, FICA and federal taxes are the highest burden in history. This stifles entrepreneurship and hinders the financial risk-taking necessary to create jobs and get out of a Great Depression.

Yet in the face of this unprecedented carnage from sea to shining sea, government bureaucrats think it’s a priority to shut down lemonade stands run by 4 year olds. And have SWAT teams raid farms for selling…raw milk. And clamp down on Americans sitting in their own bedrooms, on their own computers, playing online poker with their own money. Insanity reigns.

Do you get the picture? This Obama Great Depression is compounded by levels of debt, taxes, spending, entitlements, government bureaucracy & idiocy, as well as sheer numbers of government employees and illegal immigrants never imagined in 1929. Disaster looms. The iceberg bears down upon us.

We are in deep, deep trouble. There is no easy way out. The economy is crumbling. The situation is turning more hopeless by the hour. All of this is caused by big government. Yet Obama’s solution is bigger government. We are addicted to spending. Obama’s solution is more spending. We have mountains of debt. Obama’s solution is more debt. Taxpayers and the Tea Party are revolting. Obama’s solution is to blame the victims.

The solution is simple- cut government, cut spending, cut entitlements, cut the debt, cut taxes, stop the wars, end the Fed, term limit politicians, back the dollar with a gold standard…and most importantly, send Obama packing before there is no economy or country left to save. Or, like so many other great empires of history, America may never recover from this greatest of all depressions.

Obamageddon.

The opening paragraphs indicate the direction of Abrams’s argument:

The next time someone argues that the New Deal failed, and only the Second World War ended the Depression, as ‘proof’ that government spending does not work, one can respond with the details of economic growth and unemployment reduction up to 1940, or one can ignore the claim and thank them for making your case for massive government spending in a deep, broad recession.

Right wing politicians are loathe to credit the New Deal with any success in hoisting the United States out of the Great Depression, but credit World War II for that achievement, believing that that somehow disproves Keynesian economic theory.

That claim, however, undermines their entire premise.

Abrams concludes that “massive government spending at a time of severe economic downturn and dislocation can indeed get an economy humming again,” as World War II shows; the New Deal was merely too timid. He seems unaware that his argument merely restates the fallacy-ridden hodge-podge of conventional wisdom about how World War II “got the economy out of the Depression” that has dominated the thinking of economists, historians, and the public ever since the war itself.

When I began to teach U.S. economic history at the University of Washington in the late 1960s, I quickly realized that this tale of the wartime “Keynesian miracle” could not withstand critical scrutiny once one went beyond the barest account of it in terms of the elementary Keynesian model and the standard government macro measures, such as GDP, the consumer price index, and the rate of civilian unemployment.

Almost immediately I saw that unemployment had disappeared during the war not because of the beautiful workings of a Keynesian multiplier, but entirely because about 20 percent of the labor force was forced, directly or indirectly, into the armed forces and a comparable number of employees set to work in factories, shipyards, and other facilities turning out war-related “goods” the government purchased only after forcing the public to pay for them sooner (via wartime taxes and inflation) or later (via repayment of wartime borrowing).

Thus, the great wartime “boom” consisted entirely of (1) some people’s mass engagement in wreaking death and destruction and (2) other people’s employment in producing supplies for these warriors after the government’s military labor drain, turning out “goods” never valued by consumers or private producers in voluntary transactions, but rather ordered by government functionaries and priced completely arbitrarily in a command-and-control economy. In no sense was the alleged “wartime prosperity” comparable to real, normal prosperity. The pervasive regimentation, rationing, price controls, direct government resource allocations, and forbidden forms of production (e.g., civilian automobiles) should have served as a tip-off.

After teaching my own students along these lines for many years, I eventually began to write articles and books pulling together my various studies. The most coherent of these books is my Depression, War, and Cold War, published originally by Oxford University Press in 2006. For all of the good I’ve done in correcting people’s understanding of what happened to the U.S. economy during World War and what lessons one might justifiably draw from that experience about, say, the scientific validity of the Keynesian model or its related fiscal-policy implications, I might just as well have held my breath and turned blue. Here we are in June 2011, and millions of Americans are being presented with the purest potion of economic misinformation one can imagine, an account in no way superior to those the young Keynesians were peddling so confidently in 1944, when I was born. Perhaps my mother ought to have strangled me in my crib, to spare me the bitter disappointment of seeing the research and writing I’ve carried out over more than forty years prove to have been completely in vain.

For the Paul Abrams’s of this world, of course, none of this makes the slightest difference. They are at pains not to understand how the economy actually works or to endorse policies that promote its greater productivity, but only to concoct a plausible rationale for the government’s taxing “the rich” more heavily and spending oodles of money on a laundry list of leftist idols — government “infrastructure,” green energy-conservation programs, high-speed rail, and the rest of the wasteful and economically foolish purposes that progressive politicians espouse to feather their own nests and enrich their cronies and political dependents at public expense. If they haven’t learned any sound economics by this time, chances are slim to none that they will ever learn any, but I cannot believe that they care about such learning, in any event. Politics is the name, plunder’s the game.

There’s a lesson here, besides the obvious one that public discourse consists overwhelmingly of ideological sound and fury, signifying nothing solidly connected to reality. For me, the main lesson is: mommas, don’t let your babies grow up to become economic historians. If you do, you only put them in line to have their hearts broken.