Well as the inflation/deflation debate rages and central banks begin to
raise interest rates, you could get a good view of what an extended
term of deflation would mean by checking out the excellent new Coen
brothers' film A Serious Man. The movie's protagonist meets
a continuing series of ever greater tragedies feeding on themselves and
sending him into an extended downward spiral. This is what happens with
deflation, it feeds on itself, and over time economic activity remains
stagnant or spirals
downward.

One component of deflation can be unemployment, as people formerly
employed no longer create demand. Today, the NYT reports the Obama
administration wants to "fix the safety net," is "thinking through all
additional potential strategies for accelerating job creation," and
finally, "but officials emphasized that a decision was still far off
and that in any event the effort would not add up to a second economic
stimulus package, only an extension of the first."

Now, there certainly needs to be continued government spending, most
importantly to keep a floor intact that both people and the American
society do not fall through. However, government stimulus will at best
be only marginally effective until we fix our insolvent banking system.
Chris Whalen has another excellent
piece on our banks and until these issues are addressed there will
be no sustained economic recovery. The bank bondholders need to take
losses. Mr. Whalen suggests should we start the bid at 70 cents on the
dollar.

More importantly, I'd like to point out other problems with many of the
calls for greater stimulus. The American economy needs to change and
the more money dumped into it through the entrenched crony interests of
DC will put us further behind. 2009 DC is not 1939 DC. Just advocating
spending more money is detrimental, not helpful. The fact is, on a
planetary level, the American economy as currently constructed is
unsustainable. In America, we must in fact shrink production,
consumption, and services, and contrary to industrial economic
doctrine, in so doing, we might all very well live better lives. The
celebrants of Keynes at this point would do much better spending less
effort embracing his thinking of the 1930s and instead celebrate
Keynes' smashing of his day's economic orthodoxy, which is what we are
in desperate need of today.

Finally, every day there's more and more interest on the dollar, whose
demise at this point is greatly exaggerated. The Independent has a
piece claiming that a cabal of oil producers, Chinese, and
Europeans are conspiring against the king. Fine, we could use a little
regicide, but don't underestimate the problems of implementation. Much
talk on the dollar fails to take into account the real value of the
dollar  -- the dollar =3D globalization. The last half century of
corporate globalization has been predominately an American enterprise.
The American military provides the order, such that is, allowing this
system to function. A cataclysmic drop in the dollar would impact much
of the rest of the world to as great a degree as it would the US. It is
both agreeable and necessary for the dollar to lose its role as global
reserve currency, but do not in anyway underestimate what that
encompasses.

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