House prices are still falling and will continue to wear away at banking solvency.

Stimulative spending by the government will help, but it too can only do so much. Consumers are likely to use a fair part of any new government checks to pay down debt and save for coming difficulties, rather than rushing out to spend. Infrastructure projects, while sorely needed, will take quite a bit of time to get up and running.

The international economic situation has also deteriorated rapidly, taking away demand for US products. What’s more, there is a very real risk some time in the next year foreigners will become less willing to finance the massive borrowing the US will need, imposing a limitation Obama’s predecessors were lucky enough not to face.

US borrowing plans and debt obligations have mushroomed in the past six months as the country moved to bail out its financial industry and provide some limited succor to consumers. Taking mortgage companies Fannie Mae and Freddie Mac into conservatorship has also at a stroke hugely increased the amount of debt for which the taxpayer is effectively on the hook, though without much improving the flow of mortgage money to a housing market that is still falling.

While marketable government debt securities were only about equal to 30 percent of GDP at the end of 2007, if Fannie and Freddie debt is included that figure now hits closer to 75 percent. There is also a US$700 billion bank bailout to finance, as well as Obama’s $175 billion stimulus package, which could easily end up being considerably bigger.

“Funding for the United States’ fiscal deficit remains inextricably linked to the appetite of foreign investors to hold increasing amounts of assets,” Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ in Tokyo wrote in a note to clients. “There are increasing arguments for foreign investors to reallocate existing assets toward ‘value’ stocks rather than to absorb new US debt issues at current low yields.”

A reallocation away from US debt into any other asset, or even an unwillingness to purchase more of it as more becomes available, would in some mixture drive US interest rates higher and weaken the dollar.

What’s that whirring noise? There will inevitably be much talk about how a new administration will avoid the policy errors of the past and inspire confidence. There certainly are plenty of past errors to avoid; much of official policy seemed to be centered on winning “confidence” by denying the scope of the problem with one hand while furiously bailing out counterparties with the other.

But even with the best will in the world toward the new administration, the fact is that debt deflation, a global recession and at best comatose and at worst insolvent banking system won’t really respond to new brooms.

The run of data in recent days has been truly brutal. After a time, probably well before the inauguration, this will be what transfixes the market.

The Institute for Supply Management said its index of national factory activity fell to 38.9 in October from 43.5 in September. A reading below 40 is both exceptionally weak and the lowest in 26 years.

A report showing US private employers cut 157,000 jobs in October strongly indicates a very harsh official reading on job numbers this Friday and continued pressure on employment and consumer spending.

The Fed’s October senior loan officers’ report showed market tightening of credit conditions since July, when conditions were hardly loose, especially for commercial and industrial loans. A near-unanimous 95 percent of the banks surveyed tightened the cost of credit to large and mid-sized commercial borrowers. Remember too that this is a leading indicator, as credit availability and demand now will help determine business capital spending and hiring next year.

So look for more of the same: more poor data, more stimulative spending, more bank intervention and more interest rate cuts.

At some point, it is not inconceivable that the Obama administration, in cooperation with their new partners at the Federal Reserve, begin to look at less conventional, and riskier, measures.

“Policymakers must also be contemplating more unconventional policy measures, such as outright monetization,” Robert Lind, an economist at Royal Bank of Scotland, wrote to clients. “But I suspect they will only use these measures as a last resort, given the potentially negative implications for inflation and the dollar.”

If printing money rather than borrowing it becomes part of the debate, it will be very interesting to see how the United States’ international creditors react.

I’d bet it won’t be well.

Reported by James Saft*

* James Saft is a Reuters columnist. The opinions expressed are his own.