[quote=Arraya]Consumer credit has contracted 15 of the last 16 months. Bernake was just out telling lenders to make it easier for small businesses to get credit.
Credit is a money “equivalent” but not measured in M2. Some say credit is the vast majority of “money” supply. Depending on definitions.
Here’s Mish, from 2008;
”Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed.
These are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark. Yes, there was deflation in Japan. Furthermore, if deflation can happen in Japan, then there is no reason why it cannot happen in the US as well.”[/quote]
Credit is not the same thing as money and the two cannot be “summed” as if they are the same thing. Quoting once again from the article I ALREADY LINKED TO in this thread:
Some people argue that the “credit deflation” — the reduction in lending and borrowing — will overwhelm any money-printing the government can undertake.
We’ll begin by once again pointing out that the government can create as much new money as is needed to stoke inflation.
Additionally, this argument blurs the distinction between money and credit. Credit and money are not the same thing. Imagine a desert island where the money supply consists of a single $10 bill. There is, to put it another way, $10 worth of ability to purchase. The $10 belongs to Alice, but she lends it to Bob. Bob turns around and lends it to Charlie, who lends it to Dave. There is now $30 worth of credit in the economy, consisting of three separate $10 loans. But there is still only that one $10 bill. All the lending has moved the $10 around, but it hasn’t created any new ability to purchase.
Outside the fractional reserve banking system, lending does not create purchasing power. For every borrower who gains purchasing ability, as in our example on the island, there is a lender who had to forfeit that purchasing ability.
It’s different for banks. They can actually lend money into existence — but in so doing, they are creating credit and money at the same time. The money they create will become part of the money supply.
So it’s really money, not credit, that is the proper measure of society’s aggregate ability to purchase.
With that said, there are some ways in which a credit contraction can put downward pressure on both prices and new money creation.
Credit doesn’t increase aggregate purchasing power, unless it also leads to the creation of new money, but it does tend to move that purchasing power from “strong hands” to “weak hands.” The money is being lent by someone who doesn’t want to spend it to someone who does. So credit is an accelerant to monetary velocity, and a credit contraction can accordingly induce a price-deflationary effect.
Reduced willingness to lend on the part of fractional reserve bank could also slow the rate at which new money is lent into existence. Money supply could theoretically deflate if old loans were called in and not replaced by new money growth — but the money supply charts above show that this is clearly not happening.
So as with asset price declines, credit contractions exert price-deflationary pressures via decreases in velocity and banking-sector money creation. But while credit contractions have deflationary elements, it is simply not valid to compare the amount of money being created by the government to the amount of credit being destroyed.
As far as Japan, that’s a strawman because they just didn’t print that much money. I’ve documented before that their money creation was extremely muted throughout the first decade of their deflation, and stark contrast to our own.
Sorry for the impatient tone on this guys, I just get frustrated with the constant going in circles on this topic. I wrote the above articles a year and a half ago, and have revisited the topic many times since, and yet people still keep trying to draw me into the same arguments I have addressed many times. (It adds to my frustration that all I did was correct a simple misapprehension about money supply and that once again launched all the same old tired questions).
If anyone wants to discuss the inflation/deflation topic with me, I would request that you first read both articles linked to in this post:
