Back when I first began my blog, I used to link to Krugman all the time.  I wrote a lot about the economic situation, and even in 2005 he and others were pointing out that record profits for corporations were not trickling down to ordinary workers - even educated professionals, whose wages remain flat.

Meanwhile, the roaring economy that produced stellar profits for CEOs and top investors is slowing down.  So, don't look for salaries to catch up.  And yes, real inflation is creeping up just as the Market is going soft for all the reasons you've pointed out.

Unfortunately, when the Times started charging to read its best columnists, I stopped linking to them.  But I still do read them all in the print version of the Times.

Krugman continues to be correct.  Great catch Lowell!

created by Greenspan and Bernacke, creating dollars out of thin air and pumping them into the economy, created the enormous stock market bubbles--- the liquidity had to go somewhere, and that's where it went, along with going into the housing market. Such fiat money can disappear into thin air, too, when bubbles burst.

Why did they create such extraordinary liquidity? To abort the recession of 2001, and to finance the huge budget deficits of President Bush, and also our consumer buying binge with China (our famous current accounts deficit)--- the Chinese and other foreign trading partners had to do something with the resulting dollars they acquired from our profligate consumption, so they bought US Treasuries, and are now buying US assets including not only factories and businesses, but things like roads and bridges, thus creating a sort of round-robin which worked for a few years but, in order for this round-robin to continue working the US had to keep increasing the rate at which they created fiat money, partly also in order to maintain low interest rates, hiding from American consumers the true rate of price inflation resulting from having too many dollars in circulation (credit inflation), which meant the dollar's purchasing power is deterioating at an ever increasing rate.

Now the Chinese, the Russians, and other foreigners who bought our Treasuries and assets including stocks are deciding they no longer want so many rapidly depreciating dollars; even the oil sheiks are starting to say, "pay me in euros, pay me in gold," instead of dollars. The round-robin is coming apart. We are really now dancing on the edge of a cliff, as I said many months ago in a diary here on Raising Kaine. The days of being able to create another "soft landing" by pumping fiat dollars into the economy may be coming to an end, and we could be facing really tough times, especially, as always, the gullible little guy.

One more neoconservative illusion evaporates in the face of overwhelming reality. 

Are you suggesting that the world will start dumping their dollars sparking rapid inflation in the U.S. driving us and the world into a global depression?

is already beginning to happen, no kidding. Interest rates in the rest of world are being raised by central banks, so, despite the fact US Treasuries have always been regarded as among the safest of investments, money goes where it is treated best, notwithstanding.

China has something like a trillion dollars in its foreign reserves, and as the dollar's values declines more and more so does the value of their foreign reserves, and they are beginning to dump these reserves, replacing the dollars with more solid currencies and with gold, and using their reserves to develop internal consumption to begin to control their own burgeoning price inflation--- the natives are getting restless domestically, and the Communist leadership must do something to control the restlessness. And so on.

Despite the unbelievably huge amounts of liquidity pumped out by the US, price inflation has been suppressed in the United States, partly through artifically holding down interest rates (to what is really a negative rate) but this can go on only so long, and the tipping point is rapidly arriving.

The usual Greenspan answer in the past has been to pump eve more fiat dollars into the world economy, washing away problems with increased liquidity but each time the Fed does this, an ever larger amount of dollars is required to achieve the same effect. Couple this with a several trillion-dollar derivative and hedge funds' risky financial manipulations, and some analysts are very afraid a serious default or problem could bring the whole structure toppling down, too big a mess for the Federal Reserve and other Central Banks to handle. We've come close a couple of times in the past few years, and the amount of money involved has only increased exponentially since that time; the at-risk trillions involved exceed the gross domestic product of the planet.  So they say. Of course, we may muddle through once more, one can hope.

Your excellent comments and Paul Krugman's editorial moved me to pull together some thoughts that I've been stirring around for months. I just posted  the result as a diary: "Must Fools in Paradise Ignore Canaries in Mineshafts."

If you have the time, it will take a cup of coffee to plow through it. I've tried to include plenty of hyperlinks in case you want to pursue a specific item, er, canary. If you do have a chance to look at it, let me know if portions seem to be heading astray of reality.

What should we (individuals, society, members of Congress) be doing to mitigate disaster?

My fervent hope is that there are a few economists who have split time between academe and the government and therefore have the conceptual framework as well as the real world hands-on experience to guide us out of the wilderness. Larry Summers, nowno longer at Harvard, might be one to turn to, as well as non-political professionals (2nd and 3rd tier senior civil servants) at the CBO, OMB, Commerce, and Treasury.

As for individuals? Perhaps all we can really do is try to raise the alarm and spread the word while refusing to accept as economic analysis what is mere happy talk and hoping for the best.

Society? It will become the emerging consensus of its individual members. Can U.S. citizens accept the concept of the public good--the greatest good for the greatest number--rather than the Old West myth of every-man-for-himself and winner-take-all?

Members of Congress? Let's throw out the bums who fail to address the issues in a serious way or to accept the need for individual and national sacrifice--immediate and substantial.

But let's face it. The speculative bubbles will most likely burst before the antidotes will be administered.

You said:

"Now, it's time to move some money from stocks to cash."

The dollar is at historic lows vs nearly every other currency in the world.  Here's a stunner - the Canadian Dollar is worth more than our Washington bucks.

What a disaster Bush is.  The best case scenario for the Bush legacy will be that Bush was the president who almost destroyed America, but Democrats came in to fix his disaster and make things better.  The alternative is just... Bush was the President who destroyed America.  No, history will not be kind.

That is a lot to put on Bush.  He had lots of help.  There were all those members of Congress some who still grace those halls to this day.  And as Teddy points out, the Federal Reserve just sort of sat there and did nothing.  Greenspan, of course, gave a lot of warnings in his testimony to Congress, but really failed to use his power to correct those things.  And there were all of these banks and investors that ignored sound credit practices.

Not to say that Bush doesn't share blame or that I am defending him.  But we ought not to place all the blame on a single individual and absolve all of those who participated in the crime.

I spent the last 18 months of my Uni education writing about trade policy. My study was on NAFTA, but as we know, lots of other things pop up in the process.  What became obvious was that what was going on was not trade; a country raises its own capital, trains its own workers, develops its own strategies, and then places the final product on the market. Instead, we simply have corporations running from highly industrialized nations to lesser ones taking all their capital and knowledge with them. They don't want to deal with environmental costs, etc. Thats not trade anymore than shipping a product from Virginia to Illinois is considered trade. 

The companies left behind simply cannot adjust quickly enough to compete with the staggering difference and either close their doors or in source more cheap unskilled labor, leaving the costs to be picked up by the middle class. Of course, the middle class is losing its jobs so it goes down as well.

To deal with the slowing economy, we have interest rates drop, and we have corporations handing out massive stock/dollar packages to CEOs whether they do well or not. IN essence, we start printing money like crazy The dollar weakens.

Traditionally, the dollar weakening hasn't been necessarily terrible because it makes US products more competitive. And this has been true. The problem is this:

Items produced by US globals are no longer in the US. They don't hire Americans. They don't create US jobs. They create jobs in China and India. However,  the Chinese and Indians still really depend on us buying their crap. Their economies are way over capitalized for a domestic based economy, especially China's. Their populations don't really make enough many as a whole to support the growth they are seeing. 

So we get back to housing. Housing is one market, but it shouldn't be the driving factor in an economy. Housing is a basic necessity, and if you are seeing people spending larger % of their income on their housing, its never a good sign.Nor is anyone obligated to borrow against their home when they refinance to a lower interest rate. Unfortunately many Americans did, and often to pay for things that they could pay for through other means 20 years ago, such as college tuition. So in essence we had a 'false' boom.

The reality is quite simple though. If the jobs were still here, and the larger US Corp sales were providing jobs to US workers, we could get away with what is going on.

Frankly, money is still cheap. Cheap money means a weak economy.

When the market slowed in 2000-2001, there was money still out there. It was just sitting in the money market. I am curious as to when the sell out comes where that money thinks its going to be safer....US Treasuries? Quite possibly.

To solve this problem is relatively straight forward, but I don't think anyone is really willing to do it.

I support free trade. I do not support free offshoring.

Tax all products coming into the US with an 'environment and labor tax." That tax should be equal to the costs of what a US employer would have to bear for labor and in environmental obligations. And it is the importing company, such as Wal Mart, that would have to bear those costs.

Not only does this help US companies left behind to adjust, it creates a much more equal playing field. With the massive advantages gone, jobs will start coming home because the logistics make it far more profitable to be at home than in China.

Will there still be Chinese products that are worth buying? Absolutely.

The truths we have to accept are that productivity is the only thing that can make a society wealthier - but only written laws can make the gains from productivity be shared to continue the cycle of true growth. So we need laws that use economics to force businesses to do the right thing. Or ore correctly, the CEOs.

What was interesting is that everything I wrote about 5 years ago now is coming true. When I had to present my work, I had a lot of 'mud' thrown at me. I know there were some economists out there who couldn't their work printed because no one wanted to accept that we were following a dangerous path.

Whatever you believe, the situation is only becoming more and more unstable thanks to Bush. The Chinese are stupid if they think they will come out of a massive collapse of the US economy without massive damage.

I actually believe we can get out of this hole, but we need to something in the next few years or suffer a staggering explosion.