What I like about Mish is his calculation of bank credit in the world of economics. I think it is Mish's unique contribution to the Austrian School argument, if he is not original, he certainly is first to expound it well. Here is is following a very important story, bank credit contraction in Spain. What is happening is Spain will eventually happen here.
In analyzing any story, look to answer this question for yourself: are prices falling or rising? Prices rising, bad. Prices falling, good. So when the story says "contraction" is that a result of, or the cause of prices going up or down?
The story is in relation to bank credit, so it gets tricky. The less bank credit being used, the better, since bank credit is an accepted act of fraud on participants. In this case the people not engaging in loans are consumers and small businesses.
Is that because they are cutting back on debt, or is it because they want loans and cannot get them? Whatever the case, non-participation means less costs and less profits. Less demand means lower prices, so this sounds good.
Let's step back and review something... credit in history of commerce was one entity extending credit to another with four criteria:
1. Asset backed
2. Creditworthiness
3. Commerce related.
4. Short term or tenor (related to the flow of commerce).
For example, I give amazon.com time to pay me. I give schools for whom I teach time to pay me. I am extending credit to my customers. The credit is asset backed, as Amazon.com has my books or revenue from the sale thereof, and the schools have the asset of the revenue from the course fees charged. Whether goods or services, my extension of credit to customers is asset backed.
The creditworthiness of my customers is sterling, and I won't work with customers who cannot or will not pay, or whose own reputations are not first rate.
I only extend credit when it is overall commerce related, in the sense of "this side of the end user." When I retail books off say my website, I do not extend credit. End-users do not get credit because they consume the asset.
(Although it is true under the UCC that merchandise cannot be returned for credit unilaterally, the law actually converts assets shipped to cash due.)
How much time is relative short, and related directly to how much time it takes to ship and sell on goods. Each industry has terms, such as Net 30, 30 days to pay or so.
Please note here the difference between asset-backed extension of credit in commerce vs a loan. They are very different events. Credit extension is grounded in the assets being traded. A loan is in infusion of "capital (money, credit?)" into commerce.
And then we have the ethical proscriptions on loans at usury, held by all major religions. this proscription ought to cause us to pause and recall how those religions view a loan:
1. An act of charity.
2. Never at usury.
So what is being contracted in Spain is loans of fiat currency into
Now the sketch above represents about 99.8% of the economic history of mankind. Banks involved in lending credit is very recent and very narrow in scope. Review the differences I have bee elucidating:
1. Money is usually gold or silver or both.
2. Almost no one ever uses money in history to pay for things (except at end-of-the-line events such as when Judas sold Jesus for 30 pieces of silver or the fall of the Ptolemys).
3. What makes the world of commerce go around, in history is people extending credit, as I said above,
on the basis of
Interfering in commerce by abusing the charitable act of lending in an act of usury was forbidden in ethical climes, often a capital offense. But when the state emerged, religions receded and claimed ignorance of the damage done.
With usury not forbidden, bankers began to lend money at usury. Then they began lending currency (warehouse receipts for money) at usury. Then they began to lend bank credit at usury, and then fiat bank credit at usury. No matter what they were doing technically, to this day banks call it lending money, when it is no such thing.
This explosion of credit being lent caused a problem for the banks. How to find customers for the credit being lent at usury? The concept of risk as an element in business was introduced, so people began to borrow money in speculative ventures, in a distortion of the business process. Naturally people associated money with affirmation. If you please customers you get money. Pleasing customers is what got you the money to grow the business.
Think of what happened when banks began lending credit, and people with nothing could be instantly competing with people who had built a business over ten years. When the bank extends credit to a business, it appears to the borrower his success is assured, since the bank has predicted success concretely in the form of the loan of bank credit.
Now the borrower can only compete by lowering prices in this uncreative process, so to the delight of the powers that be, both the borrower and the standing business both suffer. The legitimate standing business now needs credit too to buy in larger quantities, and compete on price. As bankers say to each other, KaChing! Banks lending credit at usury inexorably harms the economy.
As legitimate business people found this credit so cheap they began to use it too, which allowed ever more risk plus it began to foment an unnatural degree of specialization among business people. Historically, a person might have 3 or 4 ventures in which they engaged, particularly adept people 7 or 8. then came cheap credit at usury. By supercharging a particular business with an infusion of "cheap credit" management attention need be focussed on this galloping bull.
It all looks somewhat similar to legitimate business, but it is as far from it as prostitution is to married love. Specialization is good for a given business, but not for a given businessperson. Commerce invites innovation, but usury allows for unwarranted access to markets.
Now we have come full circle. Either the banks cannot lend, or people do not want to borrow, and banks have this massive ponzi scheme set up that is now closing down. It will get very ugly for all concerned. Most of all, governments have been feeding off the taxes for which collection was made possible given bank record of credit deals made. But tax revenue is derived from ersatz revenues or values, for example when a city appraises a house at a million dollars after the state boomed the prices up. Good luck with that revenue stream.
So necessarily the solution to the problem for small businesses, return to what mankind did in 99.8% of history, will starve governments. That will make for massive interventions which will be painful. it will be hard on producers, but harder yet on non-producers. The safest place to be in the next 30 years is self-employed, but get your money from customers, not credit from banks.
Feel free to forward this by email to three of your friends.
In analyzing any story, look to answer this question for yourself: are prices falling or rising? Prices rising, bad. Prices falling, good. So when the story says "contraction" is that a result of, or the cause of prices going up or down?
The story is in relation to bank credit, so it gets tricky. The less bank credit being used, the better, since bank credit is an accepted act of fraud on participants. In this case the people not engaging in loans are consumers and small businesses.
Is that because they are cutting back on debt, or is it because they want loans and cannot get them? Whatever the case, non-participation means less costs and less profits. Less demand means lower prices, so this sounds good.
Let's step back and review something... credit in history of commerce was one entity extending credit to another with four criteria:
1. Asset backed
2. Creditworthiness
3. Commerce related.
4. Short term or tenor (related to the flow of commerce).
For example, I give amazon.com time to pay me. I give schools for whom I teach time to pay me. I am extending credit to my customers. The credit is asset backed, as Amazon.com has my books or revenue from the sale thereof, and the schools have the asset of the revenue from the course fees charged. Whether goods or services, my extension of credit to customers is asset backed.
The creditworthiness of my customers is sterling, and I won't work with customers who cannot or will not pay, or whose own reputations are not first rate.
I only extend credit when it is overall commerce related, in the sense of "this side of the end user." When I retail books off say my website, I do not extend credit. End-users do not get credit because they consume the asset.
(Although it is true under the UCC that merchandise cannot be returned for credit unilaterally, the law actually converts assets shipped to cash due.)
How much time is relative short, and related directly to how much time it takes to ship and sell on goods. Each industry has terms, such as Net 30, 30 days to pay or so.
Please note here the difference between asset-backed extension of credit in commerce vs a loan. They are very different events. Credit extension is grounded in the assets being traded. A loan is in infusion of "capital (money, credit?)" into commerce.
And then we have the ethical proscriptions on loans at usury, held by all major religions. this proscription ought to cause us to pause and recall how those religions view a loan:
1. An act of charity.
2. Never at usury.
So what is being contracted in Spain is loans of fiat currency into
Now the sketch above represents about 99.8% of the economic history of mankind. Banks involved in lending credit is very recent and very narrow in scope. Review the differences I have bee elucidating:
1. Money is usually gold or silver or both.
2. Almost no one ever uses money in history to pay for things (except at end-of-the-line events such as when Judas sold Jesus for 30 pieces of silver or the fall of the Ptolemys).
3. What makes the world of commerce go around, in history is people extending credit, as I said above,
on the basis of
1. Asset backed
2. Creditworthiness
3. Commerce related.
Interfering in commerce by abusing the charitable act of lending in an act of usury was forbidden in ethical climes, often a capital offense. But when the state emerged, religions receded and claimed ignorance of the damage done.
With usury not forbidden, bankers began to lend money at usury. Then they began lending currency (warehouse receipts for money) at usury. Then they began to lend bank credit at usury, and then fiat bank credit at usury. No matter what they were doing technically, to this day banks call it lending money, when it is no such thing.
This explosion of credit being lent caused a problem for the banks. How to find customers for the credit being lent at usury? The concept of risk as an element in business was introduced, so people began to borrow money in speculative ventures, in a distortion of the business process. Naturally people associated money with affirmation. If you please customers you get money. Pleasing customers is what got you the money to grow the business.
Think of what happened when banks began lending credit, and people with nothing could be instantly competing with people who had built a business over ten years. When the bank extends credit to a business, it appears to the borrower his success is assured, since the bank has predicted success concretely in the form of the loan of bank credit.
Now the borrower can only compete by lowering prices in this uncreative process, so to the delight of the powers that be, both the borrower and the standing business both suffer. The legitimate standing business now needs credit too to buy in larger quantities, and compete on price. As bankers say to each other, KaChing! Banks lending credit at usury inexorably harms the economy.
As legitimate business people found this credit so cheap they began to use it too, which allowed ever more risk plus it began to foment an unnatural degree of specialization among business people. Historically, a person might have 3 or 4 ventures in which they engaged, particularly adept people 7 or 8. then came cheap credit at usury. By supercharging a particular business with an infusion of "cheap credit" management attention need be focussed on this galloping bull.
It all looks somewhat similar to legitimate business, but it is as far from it as prostitution is to married love. Specialization is good for a given business, but not for a given businessperson. Commerce invites innovation, but usury allows for unwarranted access to markets.
Now we have come full circle. Either the banks cannot lend, or people do not want to borrow, and banks have this massive ponzi scheme set up that is now closing down. It will get very ugly for all concerned. Most of all, governments have been feeding off the taxes for which collection was made possible given bank record of credit deals made. But tax revenue is derived from ersatz revenues or values, for example when a city appraises a house at a million dollars after the state boomed the prices up. Good luck with that revenue stream.
So necessarily the solution to the problem for small businesses, return to what mankind did in 99.8% of history, will starve governments. That will make for massive interventions which will be painful. it will be hard on producers, but harder yet on non-producers. The safest place to be in the next 30 years is self-employed, but get your money from customers, not credit from banks.
Feel free to forward this by email to three of your friends.
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