I have been using the above chart to indicate turns in the economy for a long time. Some definitions first since the chart may be too small to read the fine print. My definition of real commercial paper is the 90-day rate for nonfinancial commercial paper minus quarterly growth in nominal GDP. If the cost of carrying inventory is greater than the economy's growth money is expensive and visa versa. The real cost of paper tends to peak around the middle to end of the cycle and for the current period that seems about right.
Paper rates are coming down and by all indications the economic decline is slowing. I know all about deflation raising the cost of money but my measure is against nominal growth not price inflation -- which is a measure of dubious value. Main point is that the cost of money and the nominal economy have begun to move closer together and an upturn is closer than the consensus would have us believe. If you think the economists are all correct along with Soros Roubini et al, the capital markets are narrowing spreads and raising equity values. Not to levels suggesting robust growth ahead but to levels that are a fair risk/reward plateau to wait to see whether the upturn is coming or contraction continues into 2010.
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