[The once and future king]

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First and foremost - Many on this board believe in the assertion that the Great Depression was caused by a contraction of the money supply. Regardless of the validity of this assertion, one must concede that there is no such contraction occuring today.

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This is an complete and utter fallacy. This is exactly what is happening today. What exactly do you think the term credit crunch means?

Not long ago the financial system was throwing credit at anyone with a pulse and inflating the money supply as a consequence. Now the banking system wont even lend money to each other because they are unsure of who is holding the toxic waste.

The fed and CBs might inject some liquidity, but so far this has had little positive effect on LIBOR and interbank rates which are at record highs and reflect the true cost of money. Indeed today the $one month libor jumped 40bp.

Also markets that deal in commercial debt have ground to an absolute standstill. Read this from yesterdays Telegraph (pro tory broadsheet)

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By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 7:18pm GMT 28/11/2007

Companies in Britain and Europe have failed to place a single high-yield bond since the credit crunch kicked off in August, and may now have to wait until next year before the credit market reopens for business.

Société Générale said the monthly volume of junk bond issues peaked at €6.5bn (£4.69bn) in June, falling to zero in August, September, October, and November as investor flight from the market forced up yield spreads to stringent levels.

Far from returning to normal, the credit markets appear to tightening even further into the Christmas season.

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The liquidity being injected by the fed et al is no where near enough to restore liquidity to normal levels it is just enough to keep the system ticking over without there being a catastrophic gridlock in liquidity.

It is also a tiny drop in the ocean compared to the amount of debt/money supply/ that was crated by the financial system over the last five years or so.

It is important that there has been no housing bubble in the USA or the UK (where house prices have increased even more rapidly than the US) there has been a credit bubble. House prices are going down simply because there is less money chasing the houses because the credit that bid them all up has disappeared. The idea that this bubble can pop, which it most certainly has in a big way without there being a contraction in the money supply is obviously nonsense.

To claim that there is no contraction in the money supply reveals that you have no understanding of the conditions that may lead to a 1929 esq scenario.