Montreal, Canada

The credit system might not be jammed compared to 12 months ago but it's still clogged across Europe. But that's not the case in China where credit is almost free, courtesy of the People's Bank of China.

Bank credit in the United States, Canada, the United Kingdom, and across Europe remains difficult to secure with smaller businesses struggling to refinance or secure vital cash-flow to fund daily operations. Credit impairment is so bad that recently the Obama Administration introduced a new lending facility to ease small business borrowing requirements.

But Europe faces a lending chill with many euro-zone banks still hoarding cash and only lending to the largest and most credit-worthy clients. Loan demand has also fallen off a cliff this year.

Data from the euro-zone this morning suggests European businesses and households are still having a hard time securing credit. Private-sector loans in the 16-member euro-zone declined annually for the first time on record in September. Despite a rate hike by the Norges Bank in Oslo yesterday the trend across Europe is to keep short-term lending rates steady as credit impairment continues across most countries. Russia cut its benchmark rate yesterday – one of the few peripheral European central banks still cutting interest rates.

The European Central Bank, or ECB, reported that lending to the nonbank private sector declined 0.3% in September compared to 12 months earlier. The ECB's broadest measure of money-supply growth – M3 – slowed in September to just 1.8% year-over-year.

While European broader monetary aggregates remain sluggish, Chinese bank credit is booming.

Broad measures of Chinese money-supply show a bull market in monetary aggregates with growth exceeding 25% over the last 12 months. China, which controls bank lending, has compelled banks to open their coffers since last fall to boost economic growth; in the process China has unleashed a spectacular credit boom that is fuelling an asset bubble.

In Europe, however, deflation remains a primary threat to economic growth as several countries continue to struggle with plunging loan demand and bulging budget deficits.

The United Kingdom and Ireland are by far the two most devastated economies in Western Europe; the IMF should already be lending to Ireland but for obvious political reasons has balked. Italy and Greece are also possible IMF loan candidates – eventually.

The great tug-of-war between the forces of global deflation and inflation are now facing off as the market continues to project future price pressures by bidding gold, oil and other commodities through the roof since March. Yet several inflation gauges, including TIP break-even rates, wages, employment and commercial real estate all point to benign, if not declining, inflation.

One thing is certain: In the absence of bank credit expansion, a sustainable economic recovery in the West is elusive and risks tipping economies back into recession in 2010 or 2011.

Amazingly, while credit is still hard to secure in the West it's almost free in China – home to the greatest asset "bubble" this decade and probably the next major financial crisis down the road.