Guy thanks for your excellent questions.

To your first point, bank lending does not need to abate in order for a recession to occur. What is necessary for the recession to occur, is that the lending be utilized for consumption, as opposed to increasing the productive output of the economy. Think higher tax and interest rates causing producers to curb production. In that scenario we would have a decline in output (recession) yet higher inflation.

The second question deals with the deflating home prices and recession leading to deflation. Since the housing market is exiting a bubble, it will decrease in value but  most other asset values will increase due to the continued actions taken by the Fed. A recession does not cause prices to fall if the Fed tries to monetize growth (remember the 1970's).

As long as monetary growth continues to expand we will have rising commodity prices. Whether or not the moves by the Fed lead to a recovery in the economy depend on the direction of tax and interest rates and the rate of inflation. I am looking very closely to see if MZM, M3 or the rate of bank lending falls off a cliff. If so, that will be a signal that the consumer has stopped borrowing and that will lead to a severe recession and falling commodity prices. To this date I have not seen any indication of that outcome, but will monitor the data closely.