Money vs. Credit

posted by Nima

April 19, 2009 · Posted in Monetary Economics 

Mish defines inflation and deflation as an increase/decrease of money and credit, respectively. He brings this issue up a lot in his posts, for example:

The logical outcome of the above discussion is that a proper definition of inflation or deflation must be built on the foundation of a sound definition of money supply that distinguishes between money itself and credit. The definition should also ensure that the horse and the cart are in their proper places.

The problem that I have with his explanations is that nowhere I have seen him make a clear and precise definition of what he means by money vs. credit.

The two don’t preclude each other. Money is the commonly accepted medium of exchange. Credit is the exchange of present goods against future goods. A money credit transaction it the exchange of present money against future money. Virtually all credit transactions are money credit transactions.

If new money is created via credit expansion, the money is injected by a central bank or fractional reserve banks via the purchase of a newly issued credit instrument, a claim to future money. Credit increases, just as money increases on the recipients bank account. When the money is repaid, money disappears from the recipient’s bank account, the credit instrument disappears from the bank’s balance sheet and the money supply, ceteris paribus, falls, just as credit falls.

If one catches the appearance of this newly created money and the disappearance thereof on individuals’ or businesses‘ bank accounts, the money supply is perfectly accounted for. The true money supply accomplishes just that. Thus it would suffice to say inflation/deflation is an increase/decrease in the true money supply, respectively.

Thus I am not sure what Mish is referring to when he talks about money vs. credit and so far I have not really found a sufficient answer in his posts. Nor have I received any satisfactory answers from him directly that addressed my concerns outlined above. What he could be talking about is maybe base money injected by the Fed vs. fractional reserve money created on top of the base money. If this is the case then he should refer to it in those terms to avoid confusion. If it is not, then I am still confused.

Any suggestions are appreciated.

Update: I have now dealt with this issue in my post Inflation & Deflation Revisited which clarifies the questions above.

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Comments

6 Responses to “Money vs. Credit”

  1. C on April 30th, 2009 4:03 am

    “…I am not sure what Mish is referring to when he talks about money vs. credit ”
    The same can be said for a whole host of ‘experts’ & journalists in the media.

  2. Nima on May 3rd, 2009 3:17 pm

    @C: Did you actually read the whole article?

  3. C on May 3rd, 2009 6:03 pm

    Probably not Nima.

    The long & short of it is that I try to read a little every day on the subject but I don’t get through everything thoroughly. Here’s the typical:

    :::1st paragraph of blog/article:::
    “mommy, I’m hungry”
    :::2nd paragraph:::
    “mommy, I’m thirsty”
    ::::back to 1st paragraph::: (it’s been a few hours since starting article/blog and I’m trying to remember why I was interested)
    “mommy, come play fire station with me”
    :::11 pm, reading article/blog bleary-eyed::::
    :::typing comment:::::

    I shouldn’t have commented. I think it was done in the context of recently having listened to an ‘expert’ on the radio discussing inflation only as a function of a rise in prices followed by the typical discussion of Keynesian-inspired solutions for the economic woes of the world. I believe I was experiencing lingering irritation about it when I read this post.

    My apologies.

  4. Nima on May 3rd, 2009 6:19 pm

    Haha, no worries :)

    I admit I felt slightly offended because I thought you were equating my writing with those clowns in the media.

    Sorry for taking so long to reply to your comment.

    I am happy I installed this new kick-ass captcha authentication so I don’t have to plow through hundreds of spam comments anymore.

  5. C on May 4th, 2009 1:56 pm

    I definitely was not equating your writing with the clowns in the media. Yours is light years ahead of the conventional spewage.
    btw – There is a special place in hell for spammers. I am sure of it.

  6. Dwain Dibley on February 12th, 2016 11:21 am

    I know, this is 6 years later but if you will alow me, I think I can explain the difference between money and credit:

    The U.S. monetary system is based upon U.S. Legal Tender Money, which is defined in law as U.S. Coin, Currency and Federal Reserve Notes, the official currency of the United States. Legal tender, physical cash, is a debt free monetary medium of exchange that is our money, our property, it is what is represented in every deposit account and it is what we are owed in payment.

    Whereas, asset backed, debt based credit is an accounting entry denominated in the legal tender, with the only legal validity given to it, going to the debts incurred with its use. Credit has no legal standing as a money, a currency or a medium of exchange, regardless of the institution that generates it.

    All you’re doing when you use a debit card (credit) to make a purchase is, transferring your obligation to pay the store owner, to the bank, payment has yet to be made. The bank deducts the amount from its debt to you, as represented by your account with them, and adds that amount to the debt it owes to the store owner, as represented by his account with the bank. There was no money or currency of any type, digital, electronic or otherwise, used or exchanged in that transaction, just a transfer of an obligation to pay, which has yet to be met.

    The notion that we’re using ‘digital money’ or ‘digital currency’ or ‘digital dollars’ as a medium of exchange is nothing more than a trick of the mind, figment of our imagination, a self deception, it’s how we rationalize the transaction.

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