I have presented a bunch of data on household debt, corporate debt, financial sector debt and government debt.  But what does it all mean?

First, the economic situation is bad. We had economic growth driven by unsustainable levels of consumer spending which was the result of a housing bubble that made consumers feel richer than they were.  At the same time corporations and especially financial companies operated with too much leverage.  Now consumer spending is dropping off a cliff and corporations are scrambling to delever.  The net result will be a significant contraction of the economy resulting in higher unemployment and a rise in personal and corporate bankruptcies.

Second, just how bad it will get depends a lot on how well we react to the crisis. Here the data suggests concrete measures:

1. We need to restructure houshold debt.  The primary way to do this is to reset mortgage terms. There are many good proposals out for how to do this.

2. For corporations that run into trouble we should resist the temptation to bail out old industries and companies, even if that will be really painful (e.g. in the case of a GM).

3. We must *not* pour money into bottomless pits in the financial sector, such as AIG, even if that means more heavy handed government intervention. It is a solvency crisis and we should not throw good money after bad.

4. There is room for fiscal stimulus and we should choose to do that in the form of investments in energy, education and infrastructure.

Implementing these measures will be difficult.  Especially #2 and #3 above will run straight into some very powerful interests and I hope that Obama will have the toughness and support to do the right thing.

Third, among all of this, we should not lose sight of the incredibly powerful long term growth trends in the world, especially for those of us investing in or starting Internet businesses.  Hundreds of millions of additional people are connecting to the Internet around the world.  Mobile is putting the Internet in our pockets.  So there is lots of reason to tough it out.