Here's what I view as the key passage in Smith's lengthy piece:
Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.The distinction between credit and cash is an important one to make. While a lot of people have recently been pointing to an increase in M2 as evidence of inflation, i.e., the expansion of the money supply, the fact is that M2 is just another way of measuring credit as it reflects obligations held by financial institutions to repay depositors. The base money supply M0, which includes both circulating currency and currency held in bank vaults as reserves, has essentially stayed flat while M2 has been growing. In other words, the number of demands for the same base money have grown while base money has not, which implies a deflationary spiral if and when the next financial crisis hits.
This is why some claim that hyperinflation has never occurred in a credit-based system; it can only arise in a monetary system in which cash itself is printed (i.e. Zimbabwe et al.)
I am not making any such broad claim, but to identify the two as identical seems to me to be a profound confusion.
This distinction plays out in a number of ways. If the Fed had actually printed $1 trillion in cash and dropped it from helicopters, then those collecting the cash on the ground might have spent it, creating more organic demand for goods and services.
If the Fed creates credit and loans it to banks at zero-interest rate, the credit only flows into the real economy if somebody borrows it.
Without borrowers, the "money" just sits in reserves, where it does not spark inflationary organic demand for resources, goods or services.
If someone borrows the "money" to refinance existing debt, the only money that flows into the real economy is the difference between their original debt servicing costs and their new debt servicing costs, presuming the new costs are lower than the original. (Not always the case if said borrower had an interest-only "teaser rate" mortgage that he/she is now rolling into a mortgage with principal payments and a market rate interest payment.)
Or a large speculator (trading desk, hedge fund, etc.) could borrow the credit-money to speculate in commodities, driving prices up on the widespread expectation of higher costs in the future. In this case, the credit-money does influence the real world economy by driving commodity prices above levels set by organic demand.
But speculative "hot money" is not organic demand; it flees or is lost if trends suddenly reverse.
Since commodities such as oil are priced on the margins, this matters. A sudden decline in oil from $86/barrel to $76/barrel would trigger an exodus from speculative long positions, reinforcing that decline in a positive feedback loop.
Think of it this way, if everybody tried to to pull their money out of the banks at the same time, there'd only be enough cash to pay out what I think of as "RealM1," which is M1 minus the amount of money in circulation (official M1 already excludes the amount of money held as bank reserves). What I think of as "RealM2," which is M2 minus RealM, is nine times the size of RealM1.