As the summer wears on and into the fall, housing prices will crash once again. Along with them, this time, durable goods will also crash. You'll see this reflected in the increasing number of "sales" at your local Wal-Mart and other retail stores. Formerly thriving strip malls will start to look like ghost towns, where they haven't already, and you will notice a increase of vacancies at your local shopping mall. Going into the mid-term election things will get bleak.

The elections make things a bit dicey, but I think it's safe to say regardless of the results, by the end of the year we will see another round of "stimulus" using borrowed funds. The size of the stimulus may be mitigated by how the elections are looking, or how they turned out (depending on the exact timing) but I'll give it a range of anywhere from $100 Billion to $600 Billion. It will be interesting to watch sales of treasury bonds after the stimulus is announced to see if there is any creaking in the hull yet. I predict that this round of bond sales will not fail, but will bring us precipitously closer to the point where they will. We may see yields start to spike, and that will be a dangerous sign if they do.

Europe is at least right now talking the talk of austerity. If they actually show they have the mettle to stick with it I predict a turnaround in the Euro and falling bond prices across Europe as investors start to look at the U.S. with a skeptical eye. However, this is a big IF. All the talk of austerity could be just that. Talk. Politicians are well known for saying the right thing at the right time to calm investors nerves. If it ends up showing itself to be just talk then I expect the scrutiny to stay on Europe while we dig ourselves an even deeper hole.

That's how I see it. We'll see what happens.

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In the real world this may work from time to time, though it must be exceptionally rare. And as I have been reading this morning of some galactically stupid advice given by Paul Krugman, I am inclined to believe that following it won't turn out so well for the global economy as it did for Sorkin's fictional character.

The Wall Street Journal this morning has a piece outlining the advice, which is a criticism of Germany's Axel Weber. Krugman says, in response to the prospect of Weber taking over as head of the ECB, "If you are looking for someone who is aiming for zero inflation while unemployment is rising to 13%, then Weber is definitely the right guy."

His sarcasm at the prospect is because of his belief that the government needs to keep borrowing and spending to get the economy back on track. The Germans, indeed, all of Europe is now setting on the opposite track. The scare in Greece has shown them that relying on low interest treasury bonds to keep their countries' finances straight is a fools game, and one that will eventually blow up on them. They see that they must cut back their spending. They know that if they don't, they will wind up in the same position as Greece. The problem for Krugman is that this is contrary to his Keynsian faith. Nevermind the fact that it is this precise faith, and following the advice of people like Paul Krugman that got us into this mess in the first place.

A number of blogs are reporting this quote this morning, but my favorite quote about it comes from Mike Shedlock at Mish's Global Economic Trend Analysis.

Bernanke is so dense he could not see the approaching debt tsunami two feet from the shore.

He did not see a housing bubble, he did not see a recession, he did not see unemployment at 10% and he cannot find his ass with both hands and a roadmap. Nor can Krugman.

Unfortunately, though Krugman would like to blame George Bush for all the ill's of the world, he can be no Colonel Jessup in this screenplay. The problem started long before Bush was president. In fact, it started long before his father was president. We've been riding the Keynsian train for decades, and we're out of bubbles to inflate. So, in this case, rather than following the advice of the galactically stupid, I think we're better off listening to it, and then doing precisely the opposite.

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In desperation, the German people turned to a party of thugs. Thugs who supported the "working man." Thugs who supported the downtrodden. Thugs who spoke of a great new Germany, created by the modern ideals of socialist economy, and ready to stand up to those who had imposed this burden. The creative minds of those thugs convinced their people that the Jews were to blame for their circumstances. By every right, it seems, those thugs believed this to be true. They didn't understand the economics of debt any more than people here do today. So to them, it was perfectly reasonable to believe that the blame lay with a peaceful, yet separate population that lived among them.

Today, in this country, a burden of debt is weighing down our economy. An economic philosophy largely ignored by our institutions of higher learning explains how this happens, but our "experts" are not familiar with this philosophy. Those who are have seen this situation coming. They warned of the dotcom boom and bust. They warned of the housing bust. Their warnings came true. And today their warnings are more dire than ever. Prevailing economic thought teaches us that we need to "stimulate" the economy to launch into true recovery. However, those who predicted our current predicament tell us that the root of the problem is debt. Stimulus creates more debt. And you can't solve a debt problem with more debt. Not unless your end goal is to go bust.

And that's exactly where we're headed. But going bust for a nation isn't the same thing as it is for an individual, or even a large corporation. When you or I go bust, we file bankruptcy, our creditors don't get paid, we have difficulty getting credit for a while, and our slate is wiped clean. For corporations it is similar. Most often pieces of the corporation are sold off to those that can make good use of it's components. But when a nation goes bust the whole society is left in limbo. Chaos ensues.

Today, across Europe, where the debt crises is even more advanced than it is here, public labor unions are organizing and executing protests against the austerity measures those governments are instituting to avoid economic collapse. Just as we have seen here recently with teachers unions in Illinois and New Jersey, student groups in California and others. These are the forces that are organizing today. They haven't created a scapegoat like the German thugs of the 20's and 30's yet. But the keyword is, yet. They are putting pressure on our nation and the nations of Europe to not cut back spending. They want the debt load to continue, regardless of whose back it's put upon. This debt can only lead to catastrophe.

And when catastrophe is realized and a nation goes bust, someone always rises from the ashes. History teaches us that it's usually those who are already organized. And of those who are organized, usually the most ruthless prevail.

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The so-called "bailout" of Greece will soon be exposed as not really a bailout but rather an unfunded mess that cannot be funded. When that realization enters the investment consciousness I fully expect the equity and bond markets to undergo a cataclysmic upheaval far worse than Lehman Brothers, as there is literally nothing that can be done at that point beyond a default on the unpayable obligations and the resulting impact on balance sheets - which will render major financial institutions insolvent...

The inevitable consequences of this decision cannot be avoided. They can be and have been delayed for two years, but we can't prevent them from being manifested.

The nations that decide to do the right thing first will be the ones that emerge with their governments and societies more intact than the others. This does not mean pain avoidance, but it may well be the difference between lots of pain and loss of national sovereignty - or worse.

We looked at the socialist Utopia in Europe and pined for an enlightened government that would afford us the same laundry list of benefits. We said, "If they can do it, why can't we?" Well, as we are seeing now, they can't - and neither can we. The trouble is that the end game to this is not a matter of a little bit of time collecting unemployment and then ready for the high times again. It's much more serious than that. We're playing with history here. If you have never spent much time wondering what hungry people rioting in suburbia would look like, you may want to ponder it. And you may want to figure out what you might do to protect yourself if it happens.

I have seen no evidence that our government is willing to stop it.

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Look at what is happening in Greece right now. No one wants to lend them money and their treasury bonds are on par with war-torn Pakistan. Junk. But Greece, though important to the European economy and troublesome to the fate of the Euro, is not anywhere near the size player that the U.S. is in the world economy. You know the saying, the bigger they are...

I was concerned because I didn't see any scenario playing out where our beloved politicians would pull back the reigns before it was too late. I didn't see them mustering the political will to just say, "no". But now, I wonder, if it just might be happening. The housing subsidy, granting new home buyers up to $8000 in tax breaks for buying a new home and $6,500 for non-first-time-buyers, is actually coming to an end. The papers are now starting to warn of the impacts of expanding the stimulus. And Wall Street might just give the politicos the scapegoat they need to end the madness.

Even today, Ben Bernake said, “Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in remarks prepared for a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk."

So now, even members of the old guard are beginning to have their doubts as to the wisdom of the current course of action. I can no longer say that I would be entirely awestruck were I to start hearing the politicos and media cheerleaders start trumpeting the line that they need to get out of the way and let the mess the Wall Street banks made clean itself out of the system. Now, that said, I didn't say it wouldn't surprise me, and I don't think it will happen.

I expect that the stimulus will be pulled back for now. And the economy will screech to a grinding halt. Property prices will fall dramatically again (I'm guessing another 25% or so). The commercial real estate bubble, which has been sitting at it's apex will finally burst. People will stop buying things again (with the money they are saving by not paying their mortgages, having caught on to the fact that banks aren't foreclosing). Unemployment will soar again. Then the politicians will start shaking in their boots and start pumping the stimulus prime once again. If they're lucky, the mess in Europe will still be going on and the renewed acceleration in deficit spending won't detonate the U.S. treasuries market. Yet.

The trouble with all of this is that the current deficit spending and the future re-acceleration of it that I predict do nothing but delay the inevitable. There is a ton of misallocated investment out there that needs to fail so that its pieces can be put to productive use once again and the economy can actually recover. All of this stimulus has made it worse. The future stimulus I project will make it worse still.

What we have here are two options. One option is to stop the madness and take the medicine. The economy will fall dramatically for a little bit of time, I'd say between a year and two years, and then it will finally start to climb out of the gutter on a new and healthy footing. The other option is to continue the stimulus madness until the point where the world calls us on our debt and causes a complete system crash, marking an end of the American Empire and the kind of life we've all grown accustomed to.

Of course, while I present this as a dichotomy, there are shades of options between these two extremes. We could spend the next several decades stopping and starting stimulus programs to forestall the pain, hoping for some new magic internet 2.0 type technology which will employ millions of people in some new industry that doesn't currently exist, and grind away in the doldrums in the interim. It's possible that we could keep halting these borrowing spurts before the treasury markets decide to call bull. I don't think it's likely, but it is certainly possible.

The one thing I can say for certain is this supposed "recovery" our politicians are talking about right now is not happening. And it won't happen for a long way off.

"The future's so bright..."

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Greece is now whining that their "austerity" should bring gifts - from Germany:

“We have fulfilled to the utmost all that we must from our side; now it’s Europe’s turn,” Papandreou told his ministers, according to an e-mailed transcript. “It is a historic moment for the European Union.”

No it's not.

Honest accounting is its own reward. So is fiscal prudence.

You're owed nothing Greece.

More importantly, there's no money. Not just there - here too. Witness the layoff/hirebacks in California and New Jersey's new governor - the latter who told the truth for the first time by a state politician in 30 years.

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