A while back I said that one of the things to watch for was contraction of commercial and trade credit as that would signal the contagion of the financial crisis from the financial economy to the real economy. Here is more evidence that it is going to be ugly out there - and definitely deflationary in due course:
U.S. banks sharply reduce business loans
By Peter S. Goodman, International Herald Tribune
Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.
Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term "commercial paper" not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.
The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.
I'll be writing more about Irving Fisher's theory of debt deflation as causing the Great Depression in my Friday RGE blog, which I'll cross-post here. Fisher was marginalised and neglected by the Chicago School free marketers, but is well worth reappraising given the way history is repeating itself.