Yesterday, the Dow continued to fall – down 130 points. Oil slipped lower too. And gold rose. Just as you’d expect. But two days a trend does not make.

And what’s in the news this morning?

“Europe left reeling as the people revolt against austerity measures,” says a headline in the TIMES.

Spain’s ruling Socialists got hammered at the polls. Borrowing costs are rising – pushing Italy, Spain and Greece closer to default. There is really no way out. The IMF – under DSK – made things worse by lending more money to governments that can’t pay it back. And now, day by day, the whole smelly pile of European government and bank debt gets closer to the fan.

Of course, debt deflation – writing down, defaulting, foreclosing – is what a Great Correction is meant to do.

In America, except at the household level, the authorities have been able to push off the moment of truth…apparently indefinitely. The feds have a ‘little technology called the printing press.’ And they’re ready to use it!

In Europe, it’s not so easy. The Germans don’t want to see their cash cheapened so that the lazy Zorbas, carefree Guidos, and sun-browned Rauls can continue to live in a style to which they have become accustomed.

Naturally, the Greeks are miffed. A Reuters report provides more detail:

…a large majority of Greeks reject more austerity, according to a poll published on Saturday, which also shows the ruling socialists losing their lead versus the conservative opposition for the first time since their 2009 election victory.

“Debt restructuring is not under discussion,” Papandreou said in an interview in Sunday newspaper Ethnos.

One year into its EU/IMF 110-billion euro bailout, Greece is struggling with weak revenues and deep recession, fuelling speculation that it will have to restructure its debt to pull itself out of the fiscal mess that triggered a euro zone crisis.

Everyone sees this tension between the strong center and the weak periphery as a ‘weakness’ of the European system. We see it as a strength. Not being able to debauch your currency is not a bad thing.

But over on the editorial pages of The New York Times, Paul Krugman tells us that austerity is a losing battle. He refers to people who call for spending cutbacks – in the US as in Europe – as the “pain caucus.”

As usual, Krugman sees the superficial mechanics of the system, but misunderstands its deep moral structure. Pain is for losers, he seems to say, as if enlightened economists could rid the world of suffering forever.

Sensible, solid finances bring forth long-term investment, capital formation and real growth. But not without some pain. Everyone makes mistakes; owning up to them is always painful. Ask Dominique Strauss-Kahn. By taking some pain now economies will be able to rebuild confidence…and thereby encourage greater investment and prosperity in the future. That’s the argument in favor of austerity measures. After all, banks and governments of the European periphery states borrowed too much and gambled too recklessly during the boom years. They need to pay for those mistakes before their economies can build on a more solid foundation.

Krugman ridicules the idea. He believes there is no payoff to austerity. He must think the ‘austerians’ want pain for its own sake.

“The confidence fairy hasn’t shown up yet,” he writes.

What does he expect? You don’t get confidence overnight. Besides, what have the Europeans done to deserve it? Like their American counterparts, they’ve generally listened to simpletons like Krugman. They’ve bailed out their banks, run public deficits, and added to their debts.

And now ‘confidence is plunging,’ says Krugman. Well, yes. Investors don’t know what to expect. Will there be another round of bailouts? A ‘soft default’ by restructuring and ‘re-profiling’ debt? Will Greece be booted out of the EU? Who could have confidence in this?

Krugman worries that the ECB will show some backbone – refusing any more bailouts to Greece. Then, “it’s all too easy to see how it could start financial dominoes falling across Europe.” That would be a disaster to the Nobel winner. Just like the failure of Wall Street banks…and Fannie Mae…and Freddie Mac…and GM…would have been disasters.

The man learns nothing. Central banks have spent the last 4 years trying to prevent a reckoning of the worlds’ debts. And the debts just get larger.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.