[First Guy:] I am well aware of the deluded mainstream view of credit which j-klimt seems to share. Credit is NOT capital. Period. It is the ILLUSION of capital, as mainstream economists are slowly finding out. Even the Federal Reserve does not consider credit as “money”:
“[M1] consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. M3 includes M2 plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada.”
Since credit cards do not fall under M1, M2 or M3 they are not considered to be part of the money supply"
http://economics.about.com/cs/money/a/credit_cards.htm
Again, this is basic economics that j-klimt should know before he gets into debates about investment. Its unfortunate that I am the one that has to waste time educating him.
[Second guy:] That’s funny because you just regurgitated the mainstream definition of money and inflation posted on About.com. Inflation forecasters like yourself do not understand the definition of money and definition of inflation, which is why you embrace incomplete statistics like commodity prices or CPI or base money or M3 or whatever incomplete measure of money fits your argument at the moment.
Meanwhile, true and valid economic theory as propounded by Mises, Hayek, et al. considers an understanding of credit supply to be absolutely essential to the understanding of phenomenon of inflation and deflation. Mainstream economists like Keynesians, Friedmanites, and yourself rely on incomplete, misleading, and uncalled for statistics like CPI, M3, “velocity of money,” and base money supply to support your invalid arguments. However, valid economic theory has always emphasized that credit expansion is one and the same as inflation and credit contraction is one and the same as deflation.
You don’t even know what credit means. Credit is not “illusion of capital”. If credit is the illusion of capital then credit expansion shouldn’t cause inflation, since if credit is illusory then it should not influence the value of your so called “real capital” like currency. But reality proves your assumption false. Reality confirms that credit expansion does devalue the capital in the form of currency, therefore credit is not illusory, and therefore credit expansion does cause inflation. Likewise credit contraction causes deflation. You repeatedly fail to grasp that the vast majority of money circulating today was originally created from thin air by private banks with fractional reserve lending process. Due to a vast wave of bankruptcies and writeoffs, that money (i.e. most of the money in circulation) will be written off, and will never be seen again. In other words, since all that money was created out of thin air due to fractional reserve lending, all of that money will disappear back into thin air due to an deleveraging process that will not end for years. Money is being burned to ashes, and that is deflation.
That was all from the link. Now for my own humble thoughts. It seems to me they are both wrong. The second guy is right about this, that if the bank lends money using fractional reserve banking, then that creates inflation. In that sense credit is part of the money supply.
But I think he is wrong when he says that bankruptcys and writeoffs reduce the money supply. The money has already been pumped into the system.
The original owner of the property has a thick wallet full of cash to spend which he got from selling his house. He got that money from the bank. So the bank has used newly created paper money to pay for the house.
Now it’s between the bank and the buyer of the house to fight about moving around existing money. Will the bank get it from the buyer, or will the buyer keep the money by defaulting on his loan? In either case no money has been created or destroyed.
OK, so there are three opinions so far. Can someone knowledgable enlighten me with info/explanation/links?