Money vs. Credit
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 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.