If you want to record system audio with iShowU Instant, you first need to install a driver.
The driver is bundled with the app. Here's how you do it:
- Open iShowU Instant
- Go to Audio Tab (I'm showing you the 'Advanced' view, but this button appears in both Basic & Advanced)
- Click 'Install SWB Audio Capture'
- Enter your credentials
You know it's complete when the app changes, and that "Install..." button is no longer showing.