In a break from our regularly scheduled business and economics programming, I offer some notes I just dug up from a conversation I had with Karl Rove about four years ago (on Sept. 10, 2004, to be precise).

We were mostly talking about William McKinley (a favorite subject of his) and the urban-oriented majority McKinley forged for the Republican Party in the 1896 that dominated American politics until 1932. I was throwing out the idea (it's basically Ruy Teixeira's idea) that the Republican Party seemed at risk of painting itself into the same Southern- and rural-oriented corner that William Jennings Bryan and the Democrats had in 1896. There was evidence of this in results from the last few elections. Outside the Deep South, suburban counties that had once been solidly Republican (Orange County, Calif., was the example I threw out) seemed to be migrating toward the Dems.

Rove would have none of this:

That's only because of the changing nature of the suburbs. The cities are spilling out into suburbs, the suburbs into exurban counties or smaller metropolitan areas.

I think you are getting way out there. What is happening now is that people who once lived in Orange County are now moving to San Diego or Riverside or Ventura or the Central Valley.

Is the old Republican county of Waukesha County in Wisconsin turning Democratic? No, there's no change.

It is not universal. Is Douglas or Arapahoe County [in Colorado] becoming more Democratic? No. Jefferson County is. There is no generalized trend that says the old-line Republican suburbs are turning Democratic.

Anyway, I'll be very interested in seeing those Douglas and Arapahoe and Ventura and Riverside and San Diego County results come next week. I'm betting Rove will still be right about Waukesha County, but who knows?

Graphic by Feilding Cage/TIME.com

Three years ago, when the personal saving rate (that is, disposable personal income minus personal outlays, usually expressed as a percentage of disposable personal income) briefly dipped below zero, it was easy to find economists willing to downplay the significance. David Malpass, then of Bear Stearns, was probably the most prominent low-saving-denialist. As he wrote in the WSJ in 2005:

Not only are we not running out of household savings, it is growing fast both in terms of the annual additions and the cumulative buildup of American-owned savings. Household net worth, one good measure of savings, reached $48.5 trillion in 2004. Time deposits and savings accounts alone total a staggering $4.3 trillion, versus slow-growing credit-card debt of $800 billion. True, the U.S. is the world's biggest debtor, but it is building assets faster than debt.

It wasn't just Malpass, though. New York Fed economist Charles Steindel said pretty much the same thing just last year:

Despite the decrease in reported levels of personal saving, aggregate household wealth has exhibited a strong uptrend since the end of 2002. Moreover, statistical evidence presented here suggests that past periods of low personal saving rates have not been followed by a retrenchment in spending or slower growth in living standards.

The argument was basically that, because it only looked at income and not asset values or capital gains, the standard measure of the saving rate vastly understated actual saving. Maybe so. But asset prices are volatile, far more volatile than incomes. When asset prices are in a bubble, any asset-based measure of saving is going to overstate actual saving by far more than an income-based measure understates it. As we're learning now: Stock prices are off 40% in the U.S. House prices are down 20%. The net worth of American households declined in the second quarter, according to the Fed. It's sure to decline a lot more.

What does this mean? I think it means that the saving rate, as measured the old-fashioned way by the Bureau of Economic Analysis, really does matter. The fact that it dipped so low in recent years should have been a major warning sign to the Fed and others that trouble might be in the offing--that American households might be dangerously exposed to financial-market stress.

The personal saving rate made a big rebound in the second quarter of this year, thanks to those government stimulus checks. It will probably drop back toward zero for a while, because it usually falls during recessions as people struggle to make ends meet. But after that I'd bet on a long rise. At least, I hope that's what happens.

For much of the past year, Ben Bernanke has caught a lot of flack for being too soft on inflation. Journalists mocked the Fed's apparent reliance on core inflation, which ignored the big food and energy price hikes that were of most interest to consumers. Many economists--and a couple of Federal Reserve Bank presidents--worried that the Fed was being too aggressive in lowering interest rates. Foreign central bankers seemed to think Bernanke's fears of a sharp economic slowdown were overblown.

Helicopter Ben isn't looking so dumb now, is he? The inflationary pressures from commodity markets have all reversed. The pressure on prices from every quarter--miserly banks, scared consumers, retrenching corporations--is now decidedly downward. Deflation is the specter haunting the world, and the Fed has been leading the way in fighting it. It 's likely to take took another step in that direction this afternoon by lowering short-term interest rates yet again, probably to 1%, matching the previous all-time low target maintained from June 2003 through June 2004 (the actual Federal Funds rate dropped below 1% a couple times in the 1950s, back before the Fed announced a target rate).

Deleveraging, which is entirely necessary and which we're already seeing happen around the world, can combine with deflation to bring some really horrible results. I'll let Irving Fisher explain, from his 1933 paper on "The Debt-Deflation Theory of Great Depressions":

(1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation.

This is what Bernanke has been worrying about for the past year (and he was worrying about it back in 2002 too). Now that almost everybody seems to be joining him in his concern, maybe we ought to give him a little more credit for having been right.

The fun fact of the morning, from Merrill Lynch emerging markets dude Michael Hartnett:

You can buy the entire free float of China and India with today's market cap of Volkswagen, and still have enough spare change to buy Turkey.

With VW's stock price down 42% so far today as the Great Porsche Short Squeeze of 2008 unravels, that may not be true anymore.

But that it was true, if only for a moment, would seem to indicate that, for all the talk about U.S. stocks being cheap, or at least sorta cheap, the biggest bargains are going to turn out to be in emerging markets.