by Ambrose Evans-Pritchard
26 September 2009
Private credit is contracting on both sides of
the Atlantic. The M3 money data is flashing early warning signals of a
deflation crisis next year in nearly half the world economy. Emergency
schemes that have propped up spending are being withdrawn, gently or
Unemployment benefits have masked social hardship unto now but these are
starting to expire with cliff-edge effects. The jobless army in Spain will
be reduced to €100 a week; in Estonia to €15.
Whoever wins today's elections in Germany will face the reckoning so deftly
dodged before. Kurzarbeit, that subsidizes firms not to fire workers,
is running out. The cash-for-clunkers scheme ended this month. It certainly
"worked". Car sales were up 28% in August, but only by stealing from the
The Center for Automotive Research says sales
will fall by a million next year:
"It will be the largest downturn ever
suffered by the German car industry."
Fiat's Sergio Marchionne warns of
"disaster" for Italy unless Rome renews its car scrap-page subsidies.
Chrysler too will see some "harsh reality" following the expiry of America's
scheme this month. Some expect US car sales to slump 40% in September.
Weaker US data is starting to trickle in. Shipments of capital goods fell by
1.9% in August. New house sales are stuck near 430,000 – down 70% from their
peak – despite an $8,000 tax credit for first-time buyers. It expires in
We are moving into a phase when most OECD states must retrench to head off
Britain faces the broad sword; Spain has told ministries to slash 8% of
discretionary spending; the IMF says Japan risks a funding crisis.
If you look at the sheer scale of global stimulus this year, what shocks is
how little has been achieved.
Call this a "V-shaped" recovery if you want.
Markets are pricing in economic growth that is not occurring.
The overwhelming fact is that private spending has slumped in the deficit
countries of the Anglosphere, Club Med, and East Europe but has not risen
enough in the surplus countries (East Asia and Germany) to compensate.
Excess capacity remains near post-war highs across the world.
Yet hawks are already stamping feet at key central banks.
Are they about to repeat the errors made in early 2007, and then again in
the summer of 2008, when they tightened – or made hawkish noises – even as
the underlying credit system fell apart?
Fed chairman Ben Bernanke spoke in April 2008 of,
"a return to growth in the second half of
this year", and again in July 2008 that growth would "pick up gradually
over the next two years".
He could only have thought such a thing if he
was ignoring the money data. Key aggregates had been in free-fall for
I cited monetarists in July 2008 warning that the lifeblood of the Western
credit was "draining away". For whatever reason (the lock-hold of New
the Fed missed the signal.
So did the European Central Bank when it raised rates weeks before
the Lehman collapse, blathering about a "1970s inflation spiral."
Yes, the money entrails can mislead. The gurus squabble like Trotskyists.
But you ignore the data at your peril.
Tim Congdon from International Monetary Research says that US
bank loans have been falling at an annual pace of almost 14% since early
"There has been nothing like this in the USA
since the 1930s."
M3 money has been falling at a 5% rate
M2 fell by 12% in August
the Commercial Paper market has shrunk
from $1.6 trillion to $1.2 trillion since late May
the Monetary Multiplier at the St Louis
Fed is below zero (0.925)
in Europe, M3 money has been contracting
at a 1% rate since April
private loans have fallen by €111bn
Whether you see a credit crunch in Euroland
depends where you sit. It is already garroting Spain.
Germany's Mittelstand says it is "a reality",
even if not for big companies that issue bonds. The Economy Ministry is
drawing up plans for €250bn in state credit, knowing firms will be unable to
roll over debts.
Bundesbank chief Axel Weber sees no crunch now, yet fears a second
pulse of the crisis this winter.
"We are threatened by stress from our
domestic credit industry through the rise in the insolvency of firms and
households," he says.
Draw your own conclusion. Western central banks
will have to "monetize" deficits on a huge scale to stave off debt
The longer they think otherwise, the worse it