Paul Krugman wrote in August 2002 that in order to deal with the aftermath of 9/11 and the collapse of the stock market bubble, Greenspan and the Bush administration needed to do stuff to create a housing bubble in order to stimulate demand based on home equity loans. He wasn’t optimistic that such a bubble could be created only a few months after writing, but felt it should be done.

Well, here we are at the end of the housing bubble.

Dagnabbit, Krugman! Don’t you remember what happens at the end of an economic bubble? BAD THINGS. Lots of people in 2002/2003 were predicting a double-dip recession. In those double-dippers, the second dip is typically worse than the first.

It looked like the USA dodged that bullet for a while, but I’d always been waiting for the other shoe to drop. It started to fall in 2007 and kept falling all through 2008. I think it’s rolling around on the floor right now… anyway, welcome to the second dip of that 2001 recession. It’s worse than the first one, and that worseness is sharpened by the unwinding of the artificial constructs designed to fend it off in the first place. In avoiding a deeper recession, we risked collapse of our banking and financial sector – and it’s still not out of the woods just yet.

Now he’s calling for more stimulus spending. There’s something wrong with this picture. No, I’m not arguing that we’re headed for massive inflation. I learned the lessons of the 30’s, which Krugman cites. What I see going horribly wrong is a lesson from the 80’s… the 1780’s…

The French economy was a ruin in the wake of its involvement in the War of the American Revolution. In order to work through its troubles, the government had to borrow more money. No problem, right? Wrong. Over 100 years of overspending on luxuries and wars meant France was maxed-out. No creditor wanted to lend anything to a nation that could not afford its commitments and make interest payments. The only solution was for the French to raise taxes in order to be able to make payment on more loans along with meeting its obligations.

The idea was pretty straightforward: raise taxes, take out more loans, sort out the public finance mess, then start paying down the debts. It ran into a bit of a snag when, in order to raise taxes, the king had to convoke the Estates-General, which promptly made itself the supreme authority in the land. But that’s for another story… economically, I want to go back to that creditor part: France could not borrow more money without raising taxes.

The US’ debts are increasing to the point where we may be faced with such a situation. Moreover, EVERY nation in the world is trying to borrow money to finance massive amounts of public tick. What do we do when there’s not enough money being lent? Our interest rates are next to zero right now. If we raise them, the government could borrow more money at the cost of strangling growth in business investment and personal consumption spending.

If the government instead chooses to just print money, most folks holler about the specter of hyperinflation. Set that aside for moment. Right now, most folks are saving money – and the first step of saving is paying off debts. Paying off debts destroys money, and that’s a deflationary pressure. If we should have deflation, that’s even more incentive to pay off debts today rather than tomorrow: today’s money is less dear than tomorrow’s in deflation.

The Emperors all have fancy degrees and Nobel prizes to spare: so far, basic Economics has been the child pointing out how very little they have on. The market paradigm did not shift in the 1990’s with the “Internet Economy” and neither did it shift in the 2000’s with the seemingly-eternal increase in housing prices. Those were bubbles, and they popped. Now there’s a call for massive spending: where’s the money going to come from and how will we be able to afford to borrow it? I’m sorry, Mr. Krugman. Your solution to the earlier recession was bad enough: I don’t think your solution to this one is going to be any better.

A basic tenet of Keynesian Economics is that, in times of recession, governments should cut taxes and/or increase deficit spending. The US government is doing just that right now.

However, and you knew there had to be a however for this to be a story, most state governments have to balance their budgets. In these hard times, that means they have to raise taxes and/or decrease overall spending. That means the requirements of their state budgets are working to cancel out federal fiscal stimuli.

While we’re on the subject, Keynes held that imports are a drain on GDP. When imports decrease, that shows up as a GDP increase, even though it may be indicative of a deeper economic problem, such as a collapse of demand in a nation. GDP in the USA can go higher in the recession due to this and fiscal policies and the economy can still be in the toilet. So if a talking head on the news should start bubbling about an increase in GDP for a quarter, look carefully at how much of that was due to a collapse in demand for foreign goods and unsustainable government overspending.