And suddendly things look bad again...

The stock market is down, unemployment is up, consumer spending is down, banks aren't loaning money to anyone... that's right the economy still looks bad. And while we might have dodge a total collapse of the credit markets, the key word is "might". A week ago I think most people would have assumed that we/the world had done so. Now? Not so much.

And on top of all this the truly scary word of deflation has begun to be uttered after the announcement this week that consumer prices had fallen 1% in October.

Deflation is, simply, a continuous fall in the general price level of goods and services. This sounds like a great thing—prices go down meaning you and I can buy more stuff. But that's in the very short term. If firms are making less from their goods or services, that means they have to cut back on costs—that can mean anything from cutting jobs, wages, or closing factories. And therefore you and I will be making less, and thus not spending more.

The other worrisome aspect of deflation is that firms and consumers may decide to wait to build/expand their business or wait to purchase goods. If prices are falling, I may wait to buy a new TV or car knowing that in 9 months it will cost less. A firm may wait to build a new factory because the price of the material goods and labor will be less in six months than it is today. What this means is that people aren't spending money and therefore demand continues to fall.

From a policy perspective there is only so much a government can do. Interest rates can only be cut so low—zero percent obviously. The Fed has set interest rates at about 1%. So it can't cut rates too much more (and more on that later).

Krugman and some others have begun to call for a huge stimulus. This makes sense since it would inject billions into the U.S. economy (if Americans are good at anything, it's spending money). While this might be problematic—people might just save that money, pay off debt, or invest it in some market—it also may fix the problem at hand if people spend the money.

But again, policy makers can only do so much in a deflation cycle or period. However, we are seeing policy makers acting quickly and doing something, and as I've aruged, something is better than nothing. Why? Becuase the last time we did nothing, the Depression went from bad to Great. Japan did nothing and it's stuck in 1991. Sweden did something at it is still one of the strongest economies in the world. So although you and your neighbor and some talking heads on TV might not like, sitting on our hands has proven to be the wrong decision.

A Most Peculiar Editorial

Lame title, I know... but let's just get down and dirty to one of the more peculiar editorials out there today:

His triumph was decisive and sweeping, because he saw what is wrong with this country: the utter failure of government to protect its citizens. He offered a government that does not try to solve every problem but will do those things beyond the power of individual citizens: to regulate the economy fairly, keep the air clean and the food safe, ensure that the sick have access to health care, and educate children to compete in a globalized world.

This is true, but it reeks of anger and raises a fair question: Did W fail to protect America and American citizens? I think it's a bit harsh. Where many of his policies either misguided or short sided? Yes. Is he—most likely—going to go down as one of the worst Presidents in history? Yes. But Bush did not expose this nation to harm. No a better way to say what he failed to do was that... well he failed to do anything.

Mr. Obama inherits a terrible legacy. The nation is embroiled in two wars — one of necessity in Afghanistan and one of folly in Iraq. Mr. Obama’s challenge will be to manage an orderly withdrawal from Iraq without igniting new conflicts so the Pentagon can focus its resources on the real front in the war on terror, Afghanistan.

Obama was not elected to fix or end Iraq. For Obama's political sake, I hope he realizes this.

The campaign began with the war as its central focus. By Election Day, Americans were deeply anguished about their futures and the government’s failure to prevent an economic collapse fed by greed and an orgy of deregulation. Mr. Obama will have to move quickly to impose control, coherence, transparency and fairness on the Bush administration’s jumbled bailout plan.

A harsh critique of W... but the Times is on the right path here. Obama was elected to fix the economy. But unlike Paul Krugman, the NYT editorial board doesn't totally get it.

Climate change is a global threat, and after years of denial and inaction, this country must take the lead on addressing it. The nation must develop new, cleaner energy technologies, to reduce greenhouse gases and its dependence on foreign oil.

Mr. Obama also will have to rally sensible people to come up with immigration reform consistent with the values of a nation built by immigrants and refugees.

There are many other urgent problems that must be addressed. Tens of millions of Americans lack health insurance...

This editorial is exactly what Obama should not listen to and HAS to avoid when he takes office. Obama needs to realize that he was elected to fix the economy—not Iraq, not immigration, not education, not energy—and to a certain extent health care. So why is the New York Times calling for Obama to leave Iraq, bring about immigration policy changes, fix the environment, and change energy policy?

Because the New York Times doesn't get it. They're too busy believing that Obama has this huge mandate to change everything W has done and fix everything he didn't bother to deal with. This would be a mistake. Those are issues you deal with as time moves on. And these were the issues that prevented John Kerry and Al Gore from being elected.

The New York Times is calling for Obama to be ambitious and to tackle a buch of issues quickly. This would be a mistake. There is a lot to be done, but slow and steady wins the race. If Obama can come in and do something about the economy, then he'll have the political capital to fix everything the New York Times wants. But to waste his political capital on something like, oh, climate change or immigration reform, would be a gigantic mistake since there is a good chance nothing would get done. And as we saw with W; once you burn your political capital, it ain't ever coming back.