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 Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.

By Ambrose Evans-Pritchard

LONDON, England - September 26, 2009 - Unemployment benefits have masked social hardship until now but these are starting to expire with cliff-edge effects. 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 scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect U.S. car sales to slump 40% in September.

Weaker U.S. 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, and 11% in the U.S.

Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.