Paul Krugman fears America has entered its third Depression

In a New York Times op-ed, Nobel prize winning economist, Paul Krugman, warned that the United States has entered the initial stages of a third Depression.  In his view, inadequate fiscal and monetary stimulus, coupled with obsessive worry about short-term, record breaking budget deficits, are increasing the probability of a long, deflationary-driven Depression. 

In order to stave off the next phase of the “Long Depression”, Krugman advocates a Keynesian approach of bigger, short term deficits and even looser monetary policy at the Federal Reserve.  Otherwise, he argues, just as in the 1930s, America will continue to relapse despite brief, but fairly shallow rebounds. 

And it’s not just Krugman predicting economic depression, either. 

Other economists and trends analysts are making similar predictions, but unlike Krugman, they believe looser monetary policy at the Federal Reserve and even higher deficit spending in DC will serve as catalysts for the next leg down. 

For example, from the Austrian school of economics, Dr. Ron Paul and Peter Schiff believe America has already entered another long-term depression.  But, in contrast to Krugman, they posit that excessive money printing and skyrocketing debt levels will lead to a collapse of the US Dollar.  As a result, Paul and Schiff propose an intense bout of short-term pain involving spending cuts, balanced budgets, higher interest rates, and a cessation of government bailouts in order to restore  economic stability in the medium and long-term. 

Top economic trends analyst, Mike Shedlock, advocates a similar, tough love approach, though unlike Paul and Schiff, he believes a deflationary Depression, not an inflationary Depression, could be on the way. 

Leading trends forecaster Gerald Celente has predicted the “Crash of 2010” and an ensuing Depression.  And like Shedlock, Paul, and Schiff, Celente believes the Keynesian approach advocated by Krugman and other like-minded policy experts has already proven to be a failure. 

So, who’s right? 

Both schools are making similar predictions regarding the final outcome, but their policy prescriptions are radically different.  Up to this point, America has adopted the more Keynesian approach under Bush and Obama, with record budget deficits, accelerating debt, and 0% interest rates at the Federal Reserve.  But, growth has been relatively meager, the stock market is stuck at 2000 levels, “official” unemployment is around 10%, and a record number of Americans are losing their homes and using food stamps. 

Krugman and other Keynesian economists contend, however, that had the United States not engaged in unprecedented fiscal and monetary stimulus, the nation would already be mired in a deep Depression.  And if more substantial stimulus is not pumped into the system, and fast, confidence is sure to collapse and economic stagnation is sure to become more firmly entrenched. 

Over the next few years, Americans will be able to put these different models to the test.  We will be able to assess whose predictions have proven more accurate and which policy prescriptions have been more heavily employed. 

Hopefully, we will possess the courage to follow the evidence wherever it leads.