Investors are celebrating an incipient "recovery," but the interventions responsible are sowing the seeds of a more violent contraction down the road. The problem, quite simply, is debt. We've accumulated record amounts, yet many economists tell us we need more.

Leading the charge is Paul Krugman. He exhorts us to borrow our way back to prosperity, but he doesn't acknowledge that his brand of Keynesian economics ignores debt's consequences. If you look at a chart of America's total debt burden, he's leading us over a cliff.

(Click chart to enlarge in new window)

The problem begins with the flawed way Krugman and other economists measure well-being. Primarily, they look at measures of activity, like GDP. These tell us how much people spend, but say nothing about where we get the money.

Every so often, we overextend ourselves, buying too much useless stuff with too much borrowed money. So we cut back, dumping the third family car and swapping the McMansion for a townhome.

But this is problematic for Krugman and other economists. Less spending means falling GDP. It means "recession."

They ride to the rescue with two blunt instruments -- monetary and fiscal policy -- that encourage more borrowing and thus more spending. More spending equals "growth" so economists congratulate themselves for engineering "recovery."

But if recessions never happen, bad businesses and unpayable debts are never washed away. They grow like cancer inside the system.

Since the mid-1980s, we've intervened whenever the economy hiccuped, so sectors that should have shrunk sharply -- like housing and finance -- never did. Feasting on easy credit, these sectors have exploded as a percentage of the economy.

Now, since individuals and corporations refuse to borrow more, the only way to grow spending is for the government to borrow.

According to George Cooper, author of The Origin of Financial Crises, "what is missing from today's debate is recognition that previous growth rates were artificially supported by an unsustainable credit binge, itself the result of the misapplication of Keynesian policy."

Cooper counts himself a Keynesian but says Keynesian policy has become "dangerously distorted."

"We should be using Keynesian stimulus only to arrest the rate of credit contraction not to reverse it. The harsh truth is that our economies desperately need a recession."

That's because they desperately need to de-lever. As you can see in the first chart, debt relative to GDP is at record highs.

If we want sustainable growth, spending that drives it must come from savings, not more borrowing. To get there, we must first pay old debts. And that means recession.

Krugman is clearly aware of the consequences of excessive borrowing.

"I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits," he wrote in 2003, citing a $1.8 trillion 10-year deficit projection from the Congressional Budget Office.

Fast forward six years, total debt has jumped 70 percent relative to GDP and optimistic projections put the 10-year deficit at $9 trillion.

This time, however, Krugman dismisses deficit "hysteria," arguing that we can grow our way out of debt. "We did it during the Clinton administration," he told me when he visited Reuters last week.

But we didn't. While Clinton balanced the federal budget, Americans plowed through their savings. We kept growing because, in the aggregate, we were still accumulating debt.

(Click chart to enlarge in new window)

Krugman has also argued that we can handle larger deficits because we have in the past. After all, public debt peaked at 118 percent in 1945 compared with 65 percent today.

Two problems. First, the argument ignores tens of trillions of unfunded obligations for Medicare and Social Security, debt Krugman loudly lamented in his 2003 column.

It also ignores the higher private debt burden facing us today. According to economist Steve Keen, "Private sector debt accumulated in the 1920s was wiped out by the Depression, so in 1945 the private sector's debt burden was only 45 percent of GDP. In that situation it was easy to wind down public debt from levels reached to finance WWII."

Today, private debt is a suffocating 300 percent of GDP, making more public debt that much harder to pay down.

We know how this movie ends. Look at California -- or Argentina.

We chortle from afar -- "how did their budget get so out of whack?" -- yet our own profligacy puts us squarely on that path. Like them, we've shown no political will to deal with debt. And so it will deal with us.

But we can print our own currency, you say. If all else fails, the United States can inflate its way out of debt.

Nonsense. If we try, our foreign lenders will cut us off.

As Krugman warned in 2003: "My prediction is that politicians will eventually be tempted to resolve the (fiscal) crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar."

Yet today Krugman is leading the march, arguing that we can borrow indefinitely as long as deflation remains a threat.

Tell that to the Chinese.

What happens when they stop buying our bonds? To Cooper's point, we'll need government intervention to cushion the blow of de-leveraging. But there's a difference between cushioning the blow and reinflating the bubble, which is what we're doing, wasting trillions propping up housing and banking.

The risk is that we'll have nothing left when we really need it, when the Great Leveraging becomes the Great De-Leveraging.

From Peter:

Based upon the unbelievable support that I have receieved [sic] from 10,000 supporters like you, I have decided to throw my hat into the ring to challenge Chris Dodd for the honor of representing the state of Connecticut in the United States Senate.

Peter isn't a perfect candidate, but at least he'd fight for more sustainable fiscal and monetary policies. Chris Dodd, by the way, is co-sponsoring the extension/expansion of the disastrous housing tax credit.

Peter's website is here.

But what is his platform? Those of us who are familiar with Peter's TV appearances know what he stands for on economic issues, but what about the folks who haven't seen him on TV? And what about other issues like national defense, abortion, gay rights, gun control, etc.?

Another question: Is Schiff cultivating Ron Paul and his network? Paul has a remarkably large and passionate following. They'd be natural supporters of Schiff's likely platform and could be convinced to transplant their campaign machine to CT.

This is certainly an uphill battle, but if Schiff gets plugged in with Paul, he might have a fighting chance.

Here's a sample TV appearance:

Actually he didn't do so well for his investors in 2008, but his calls for a weaker dollar and stronger performance internationally have turned positive. And his U.S. macro call was dead-on, whuich is what's most important given that we've put ourselves back on the same course.

The rising costs of Medicare and Medicaid threaten to destroy the nation's fiscal future, but President Obama is pushing for healthcare reform that would increase costs. Instead, he should refocus his presidency on paying down debt.

America's obligations over the next 75 years now surpass $62 trillion, up 8 percent since last year. And a new report released today by the Peterson Foundation suggests that total will go even higher if the House's health care legislation is passed.

(Click table to enlarge in new window)

With today's pliant bond market, it's easy to pretend we can have things that can't be paid for. But that's the kind of attitude that led California into the fiscal abyss. We have to get serious about bringing our expenses in line with our income. Now.

Unfortunately Republicans and Democrats alike are more concerned with winning elections than passing good public policy. Republicans told us "deficits don't matter," signed a prescription drug benefit for Medicare that created a bigger fiscal hole than Social Security, waged two very expensive wars financed with debt, and borrowed to bail out banks.

For their part, Democrats complain about the deficit they "inherited," then proceed to expand the bailouts, pass hundreds of billions worth of "stimulus," and try to increase our health care liabilities over and above already unsustainable levels.

Partisan economists on both sides provide intellectual cover for this foolishness, but most Americans know better. They know our spending is unsustainable. They see what's happened to California and know intuitively that government can't deliver services it can't pay for. Not forever.

Unfortunately, and this is what happened to California, the longer we wait to solve our fiscal mess, the more expensive it will be. The more we borrow today, the less we'll have in the future.

If we wait, by the year 2040, Social Security will have gone from a small surplus as a percent of GDP (0.13 percent) to a substantial deficit (-1.34 percent). Medicare's hospital insurance plan will have gone from a small deficit (-0.08 percent) to a huge one (-3.23 percent).

The Medicare trustees don't provide estimates for the shortfalls of the two other Medicare programs, including for prescription drugs since, technically, there's no shortfall: Congress has promised to fund the programs out of other government revenues.

But at that point there won't be other revenues to spare. If nothing changes, by 2040, income taxes will be enough to cover only Social Security and interest on debt. National defense, education, Medicare, and everything else will all be unfundable. At that point income taxes would have to be doubled to put us back on a sustainable path.

But we won't get that far. Long before most economists care to admit, foreign lenders will decide it's no longer prudent to buy our bonds. That will be enough to cause interest rates to rise, hammering asset values and forcing the economy into a far deeper contraction.

The good news is that this problem can be solved a lot less painlessly if we confront it today. Unlike publicly-held debt, the unfunded obligations of Medicare and Social Security are promises that can be taken back.

So instead of making new promises he can't pay for, Obama should co-opt the Republican platform of fiscal restraint. That worked pretty well for Bill Clinton after his own health care proposal died. By the end of his presidency, we were running substantial surpluses for the first time in generations. That's the kind of change that overindulged Americans truly need.

But don't expect that to happen. Obama and the Democrats will push some sort of health reform through Congress. Then they'll congratulate themselves for expanding coverage -- for getting more passengers on board a Titanic healthcare system that's heading straight for an iceberg.

When I was 14, Warren Buffett wrote me a letter.

It was a response to one I'd sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style -- diligent security analysis, finding competent management, patience -- was immediately appealing.

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company's annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company's stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money.  The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)

Without FDIC's debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn't finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder's equity.  With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had "confidence in Congress to do the right thing" -- to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Keeping this in mind, I was struck by Buffett's letter to Berkshire shareholders this year:

"Funders that have access to any sort of government guarantee -- banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government's umbrella -- have money costs that are minimal," he wrote.

"Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that ... are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be."

It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments "atrocious sales practices" in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

Conveniently, he neglects to mention Wells Fargo's toxic book of home equity loans, American Express' exploding charge-offs, GE Capital's awful balance sheet, Bank of America's disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs' reckless trading practices.

And what of Moody's, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he's held a major stake for years?  Recently Berkshire cut its stake to 16 percent from 20 percent.  Publicly, however, the Oracle of Omaha has been silent.

This is remarkably incongruous for the world's most famous financial straight-shooter. Few have called him on it, though one notable exception was a good article by Charles Piller in the Sacramento Bee earlier this year.

Buffett didn't respond to my email seeking a comment.

What saddens me is that Buffett is uniquely positioned to lobby for better public policy, but he's chosen to spend his considerable political capital protecting his own holdings.

If we learn one lesson from this episode, it's that banks should carry substantially more capital than may be necessary.  You would think Buffett would agree. He has always emphasized investing with a "margin of safety" -- so why shouldn't banks lend with one?

Yet he mocked Tim Geithner's stress tests, which forced banks to replenish their capital. Why? Is it because his banks are drastically undercapitalized?  The more capital they're forced to raise, the more his stake is diluted.

He points to Wells Fargo's deposit funding model being more robust than investment banks', but that's no excuse for letting tangible equity dwindle to three percent of assets.  At that low level, the capital structure would have collapsed were it not for bailouts.

And by the way, the strength of Wells' funding model is a result of FDIC insurance, among the government subsidies Buffett complains about in this year's letter.

To me this feels like a betrayal.  There's a reason he's Warren Buffett and not, say, Carl Icahn.

As Roger Lowenstein wrote in his 1995 biography of Buffett, "Wall Street's modern financiers got rich by exploiting their control of the public's money ... Buffett shunned this game ... In effect, he rediscovered the art of pure capitalism -- a cold-blooded sport, but a fair one."

But there's nothing fair about Buffett getting a bailout, about exploiting the taxpaying public for his own gain.  The naïve 14-year-olds among us thought he was better than this.

What would Ben Graham say?