The following article was written by George Athanassakos, professor of finance and Ben Graham Chair in Value Investing at the Richard Ivey School of Business.

The global financial market is a confusing place these days. A battle is raging between concern about deflation in the near term and inflation in the longer term. As a wave of pessimism about capitalism sweeps around the world, investors are searching for reassurance from monetary authorities that this time they won't overreact in their bid to defeat deflation and unwittingly create a more severe problem in the future.

Here is the conundrum in the balance between deflation and inflation.

There is a lot of money to go around and high levels of liquidity. Money supply (M1) has been rising at a rate of close to 9 per cent over the past year in Canada, compared with an annual average of about 6 per cent in the past 15 years. In the United States, M1 has been rising at a 19.5-per-cent annualized rate the past three months and at 11.4 per cent over the past six months to September. And the numbers are getting higher. Central banks around the world, including emerging economies, have also embarked on an unprecedented loosening of monetary policy, with co-ordinated interest rate reductions. Moreover, large amounts of capital and liquidity have been injected in the economies around the world. Strictly speaking from a monetary perspective, this is highly inflationary.

But despite the global co-ordinated easing of monetary policy, and the massive liquidity injections into the system, banks and other investors are increasingly unwilling to lend money. The rates at which banks lend money to each other remain extremely high by historical standards and mortgage rates are rising, despite global interest rate cuts by central banks. Banks are not facing a liquidity problem as they have ample reserves. The problem is that they are unwilling to lend for fear that they will not get their money back.

Banks are hoarding cash, and so are consumers. For example, “currency in circulation” has increased sharply in recent months, according to a report from the U.S. Federal Reserve, to a level not seen since 1999, when Y2K raised consumers' fears about bank computers. In related evidence, Home Depot recently reported a double-digit increase in the sale of safes in the United States as consumers keep cash closer to home.

What happens when there is a lot of money around, but no one wants to lend (invest) it? The answer is: We have a credit crisis.

Credit is the fluid that oils the economic machine. Without credit the economy stalls and the engine of growth sputters. Even healthy companies starve when credit is tightening, as they cannot pay their suppliers and employees. If demand collapses, and goods start to pile up, prices fall. Deflation ensues.