by Ambrose Evans-Pritchard
26 September 2009

from Telegraph Website


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 Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.

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 future.


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 November.

We are moving into a phase when most OECD states must retrench to head off debt-compound traps.

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.

  • China's exports were down 23% in August

  • Japan's were down 36%

  • industrial production has dropped by:

    • 23% in Japan

    • 18% in Italy

    • 17% in Germany

    • 13% in France and Russia

    • 11% in the US

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 months.

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 Keynesian ideology?) 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 Summer:

"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 since January

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 deflation.


The longer they think otherwise, the worse it will be.

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