Mish Shedlock on the Rise of Money Metals, the Fall of the West ... and Why Credit Matters

Sunday, May 06, 2012 – with Anthony Wile

Mike "Mish" Shedlock The Daily Bell is pleased to present this exclusive interview with Mish Shedlock (left).
Introduction: Mike "Mish" Shedlock blogs at Mish's Global Economic Trend Analysis, for which he has won awards from the New York Times, Time Magazine, Bloomberg, CNBC and Strategist News. Mish is a contributing "professor" blogger at the economic and financial education site Minyanville and offers podcasts every Thursday on HoweStreet. He's a registered investment advisor representative for SitkaPacific. He says that unlike many free-market "Austrians," he emphasizes credit impacts and deflationary trends within larger business-cycle manifestations. When not writing about economics, Mike enjoys photography; 80 of his photos have become magazine and book covers.
Here's a brief snippet:
Daily Bell: Do you consider yourself an Austrian in some sense?
Mish Shedlock: Absolutely I am Austrian. Money supply and credit are paramount in economic analysis. However, many Austrians missed the mark badly by failing to consider credit. To me, inflation is an increase in money supply and credit with credit marked to market. Deflation is the opposite. Those who predicted massive "price inflation" based on rapidly rising base money supply or M2 missed the boat and missed it badly. Many Austrians called for treasury yields to go to the moon. When oil hit $140 in 2008 I called for record low yields across the entire yield curve. Most thought I was crazy. My rationale was based on credit, the demand for more credit and the value of credit on the balance sheets of banks. The demand for credit plunged, the value of debt as an asset on balance sheets plunged and in response, yields plunged.
This set of events was very predictable but many called for hyperinflation based on rapid increase in base money supply and the misguided money multiplier belief that increases in money supply get lent out ten times over. In practice, the money multiplier theory is nonsense and the $1.5 trillion in excess reserves at the Fed proves it. Banks lend under three conditions, all of them required: 1) Banks are not capital impaired. 2) Banks believe they have credit-worthy borrowers. 3) Credit-worthy businesses and individuals want loans. If any of those conditions fail, credit expansion goes nowhere (at best) and is negative if defaults rise.
Except for student loans, credit expansion has indeed gone nowhere in this recovery. I wrote about credit expansion recently, complete with nice charts, in my post, The Real Consumer Credit Story: Virtually No Recovery in Revolving Credit, No Recovery in Non-Revolving Credit.
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