Yes, it’s true that the “banking credit + commercial paper” is contracting just a little, barely 2% - 3% or so from the top.

The reason is that banks have outstanding credit lines and corporations are borrowing as much as they can even if they don’t need money, because next time they come the bank may not be there.

I went back and found the chart I had read back in early August and in fact it was a chart showing Total Bank Credit AND Commercial Paper Outstanding and the indicator was the rate of change, which had collapsed from a positive figure into slightly negative suddenly in the second half of 2008. The rate of change line popped up slighlty above zero most recently. So I have to take back that comment on bank credit shrinking officially, but there is a serious question on whether the amount is actually contracting but is not yet showing up as most FI s are simply shifting loans between L2 and L3 and not marking the true status of the loan to market…the accounting seems to me ( I have limited knowledge of accounting) like a game of delay and pray..Enron’s accountint might look good in comparison from what I gather. But hey, I am only 3-6 months late !! lol..Doesn’t change a thing on how I feel about the next 3-5 years or so..intense deflation with disastrous inflation in the final phase..whenever that is (2012-2015??). Keep up the great posts. I live in Canada and can’t believe the delusion about the economy up here..yes, it too is changing and we’ll have a difficult time. The job you do, and others like you, is important ..defeating the spectacular misinformation and often outright lies coming out in the mainstream media and “experts”. I have always valued the opinion of the 20 % or less profssionals in any industry (especially the economic/financial industry) who tend to hold the contrarian view much more so than the “consensus” or mainstream forecast. Good old fashioned Pareto’s Law applied to this area of life ! So i look forward to the next post. Regards.

>>> the masses still borrowed money that belonged to others

The last report on plastic cards usage was very hot. People are burning bridges.

>>> before the despotic leaders decide on true p”printing” in the eleventh hour of this crisis

They will but slow velocity will make it non-inflationary, as you’ve said.

>>> One point on your chart that you may want to comment is the amount of credit outstanding based on this chart above apparently includes a huge amount of credit taken on very recently by the banks as a function of the SIV

No, no, it’s the chart of what banks are lending. It’s simply H8 form:

http://www.federalreserve.gov/releases/h8/Current/

>>> There are other measures that correct for this and several charts already show a very sharp contraction in bank credit outstanding in Q2

That’s very interesting, if by any chance you still have the link

>>> Finally, I think the most important key to understanding the deflation first argument is mass psychology

100% agree. It’s what I called the lemming theory:

http://yellowroad.wallstreetexaminer.com/blogs/2008/07/27/k-wave-summer-and-the-lemming-theory/

I think base money will start growing at some point soon, as the demand for simple cash will increase and cash will be printed.

>>> Much of the “growth in M2/M3 and other commonly used measures include institutional MM funds which have been taking in assets strongly

They hoard cash even if they don’t need it, just in case

Note:The ESF can be used to purchase or sell foreign currencies, to hold U.S. foreign exchange

Good questions that I have also been thinking about. It’s technicals vs fundamentals here (as usual), and it’s hard for me to see a fundamental reason for the dollar to continue its advance other than (i.e. I cannot see the Fed raising) it is still seen as ‘the world’s reserve currency’ and will be bought as economic conditions/dislocations worsen. See this comment on Russ’ blog.

Regarding oil, OPEC will probably soon cut production and this will inject another factor into the market.

- It is still world’s reserve currency;
- Foreign assets start looking extremely risky;
- US assets start looking attractive;

Hence, a lot of money will come home and take refuge in US$ (safe asset - bonds). (Whether that is right is a matter for debate.) Gold and other commodities will correct sharply indicating oncoming depression.

However, that may also prove to be the opportunity of the lifetime to get out of US$ into hard assets (Gold, Agricultural Land etc.) and foreign currencies (selective currencies - CHF, JPY etc.)

Any thoughts?

- Shankar