[This is a long blog post.  But the point, for my purposes, is that we must solve the trade deficit problem.  A major component of economic demand that we now lack, and have lacked for years, is "net exports."  Our net exports are negative.  That means low demand.  That means, irrefutably, problems for the economy.  It is fundamental.]

John Maynard Keynes is really, really popular these days.  N. Gregory Mankiw is even relying upon him now.  

Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront.

Mankiw was an economic adviser to President Bush and to Mitt Romney during the campaign.  I suspect, but don't know, that he was a supply-sider.  But he is a demand-sider today, apparently.

According to Keynes, the root cause of economic downturns is insufficient aggregate demand. When the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country.

When you won, you divided the profits amongst you, and when you lost, you charged it to the bank.
 
You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin!

You are a den of vipers and thieves."

 (Andrew Jackson, 1767-1845, 7th US President, when forcing the closure of the Second Bank of the US in 1836 by revoking its charter)

Steven Roach, head of Morgan Stanley Asia, says the U.S. should focus its domestic economic policy on stimulating savings rather than consumption.  He ultimately misses the boat, because we need to focus on re-aligning our economy with solid production of goods and food, as well as consuming and saving.  What is lagging is production of stuff, instead of importing stuff. 

But Roach does make good points, showing that the consumer-driven economy cannot and should not be reclaimed.

It's game over for the American consumer. ...

Consumers are no longer spending according to their asset growth, but rather spending according to their current income.  Which is a good thing medium and long term, but kinda hard on the overbuilt consumer market now.

In the days of frothy asset markets, American consumers had no compunction about squandering their savings and spending beyond their incomes. Appreciation of assets — equity portfolios and, especially, homes — was widely thought to be more than sufficient to make up the difference. But with most asset bubbles bursting, America’s 77 million baby boomers are suddenly facing a savings-short retirement.

Isn't consumer spending a benefit?  Too much of a good thing can kill you.

A decade of excess consumption pushed consumer spending in the United States up to 72 percent of gross domestic product in 2007, a record for any large economy in the modern history of the world. With such a huge portion of the economy now shrinking, a deep and protracted recession can hardly be ruled out. Consumption growth, which averaged close to 4 percent annually over the past 14 years, could slow into the 1 percent to 2 percent range for the next three to five years.

Nothing on reclaiming production in the U.S., as I said, but here is his idea on savings:

Krugman has been a downer for a while.  A editorial pessimist.  While he still is AWOL in the debate about a truly sane trade policy, he did warn about major financial problems that the business press cheerleaders ignored.  Krugman writes a "told ya so" piece today.  And why did those dedicated to emulating the Rational Economic Man ignore the warnings?

One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

It is more fun to be optimistic.  People like you better.  You make them feel good and positive.  "It'll all be okay."  Even Very. Serious. People. like to feel good.  But sometimes there are clouds building on the horizon that you really have to take a look at.