News flow is thick and full of furry meaning nothing right now. Nature publishes research warning us that the brain is trained to kick pattern detection when under stress, usually resulting in astrology taking over analysis in the absence of rational meaning. I understand it as evolution, since a new threat pushes you to start learning again.
So I stick to basics, money levels. That basic, my brother Carlos explained it to me about a year ago, it was the notion of "money" as in M3 and that all debt was money. I had never actually thought about money, but now I did, all paper (fiat) money was ultimately debt, private or public. Quelle surprise! In retrospect I feel very silly.
For those looking for an in-depth explaining of the debt mechanism, if somewhat cynical and off the wall, I recommend this. Careful with it. Look at the Mandrake mechanism, whereby $1 deposit is turned into $10 in circulation. (Spoiler: you lend 9/10 of capital so 1 dol is lent 90c, which comes back as a deposit to the bank, which it lends 81 and so on until the sum of it all asymptotically reaches 10).
This is how the system regulates fractional lending by setting regulatory levels of debt to capital ratios. This number of 10 is then fixed by law, was established during the Great Depression as a safety and applies to regular banks, but importantly not the old iBanks and adjacent shadow banking systems who levered up to the thirties, fifties.
They were creating their own money essentially outside the control of the authorities and essentially where creating their own money levels. This has proved dangerous if left unregulated. It has come back to bite them, actually just plain destroy them in one big blow. The TARP is aimed right at the heart of that problem.
Debt is a creative force. By investing today you help create a positive economic value by summing the discounted future cash flows. The FED can and does heavily use monetary tools as it controls the source of such debt, the US Treasury debt paper.
So when it became clear that some of the promised cash flows were never actually there, what with the real estate bubble exploding, the system started choking on its own bad debt with the dramatic consequences of the last weeks. And since the bad debt has been securitized with rubber-stamped "made in wall street" AAA ratings, the rest of the world is kind of watching the spectacle of this in horror in shock.
Monetary movement is what is happening.
The Shadow Banking System (SBS) is eating its own children with a full blown run on Hedge-funds. Money markets are hit and flight to the security of Treasuries and certain bonds (EU, US Muni). The unregulated banking system was the most levered up and is disappearing quickly and dramatically.
Just like we have monetary inflation, we have monetary deflation. If we are witnessing monetary deflation by destruction of outstanding debt in the SBS. Then the good news is that governments have plenty of leeway to start running the money presses. It will take out unregulated debts in the shadowy private sector and start managing it out in the open. Replacing opaque debt by transparent one will be, in and on itself, a stabilizing factor on this crisis. The "Mark to Paulson/Bernanke" reset button on the system may very well deliver the catalysis to go through the crisis.
Price stability is the mandate of the public entities. On the way down, servicing existing debt becomes a real burden, further choking the economy. You want to use all means necessary to prevent that spiral from taking hold. Price Stability will take priority and as debt deflates in the SBS, the FED can re-inflate on the monetary in the public eye, via programs like the TARP.
Of course this scenario is threatened by the inflationary pressure of commodities which sparked a very real price increase 6 month ago. But with Oil back down to 90's, from a high of 140, are we witnessing deflationary pressures from commodities this year as well? Some are talking about a $50 barrel, further adding to the deflationary pressure.
We will see, it is very hard to make any sense of what is going on, besides the basic monetary analysis of monetary deflation.