Lew Rockwell Interviews James Altucher and Deflation Vs. Inflation Continues

GOP presidential debate is about to begin.  I have a feeling this debate will really make or break Ron Paul.  The back and forth between Paul and Rick Perry has gotten interesting lately with Ron Paul's new Perry busting ad (which I just saw play on TV), Perry's response with bringing out a letter that Paul wrote criticizing Reagan at the end of his presidency, and the Paul campaign's wonderful response letter:

Dear Governor Perry,

After our campaign’s first ad highlighting your Big Government record and support for liberal Al Gore, your campaign is attacking Dr. Paul - missing the point of why your past is important.

We don’t think the fact that you used to be a Democrat is the big problem here. The real problem is that, too often, you still act like one. Even you yourself, Governor Perry, said of your party switch, “I will still vote the same principles, only with an R after my name.”

That's the kind of thinking that has our country teetering on the edge of bankruptcy. We cannot afford to nominate someone who thinks the letter next to their name is more important than what they believe.

Governor Perry, let me be clear: It is not that you supported Al Gore that worries us.

It is that you supported Hillary Clinton's health care plan.

You pushed for federal bailout and stimulus funds.

You support welfare for illegal immigrants.

You tried to forcibly vaccinate 12-year-old girls against sexually transmitted diseases by executive order.

You raised taxes twice.

And, state debt has more than doubled in your tenure as governor, pushing Texas to the brink of our constitutional debt limit.

It's that you supported ALL of these bad ideas that are inconsistent with how most Republicans understand conservatism, yet you now try to swagger your way into the Tea Party.

Governor Perry, with all due respect, you have used great rhetoric. But you will have to answer to the voters of Iowa, New Hampshire, South Carolina, and across the country as to why that rhetoric does not match your record.

It turns out Ron Paul knows how to play politics when it really comes down to it.  Hopefully he does well in the debate tonight because he might be getting attacked harder than usual.

Well, I never thought I would see this but Lew Rockwell has a wonderful interview with James Altucher on his show today.  The main topics of discussion are why you shouldn't buy a house or go to college.  Massive indebtedness is the main reason Altucher gives but hardly touches on the Federal Reserve and the role government had in promoting such borrowing.  Rockwell asks about this and Altucher reveals his new affinity with libertarianism and his worry about excess reserves stored at the Federal Reserve and potential for inflation.

Mish has quite the post today highlighting what he sees as coming deflation and absurdity of the inflation argument:

Deflation is about credit, it is also about attitudes that govern the demand for credit.

As I have stated many times over the years, and as stated above in the Contrary Investor, there is nothing the Fed can do to force businesses to expand or banks to lend.

That point explains why Austrian economists who focus on money supply alone have failed and will continue to fail.

Until consumer demand returns, businesses would be foolish to expand. Unfortunately, the Fed's misguided easing policies have stimulated commodity speculation thereby increasing manufacturing costs, while simultaneously clobbering those on fixed income and reducing final consumer demand.

My definition of deflation is "a decrease of money supply and credit with credit marked-to-market". Judging by symptoms of deflation and Fed's efforts at fighting it, the US is back in deflation now by my measure. In my model, falling prices are not a requirement for deflation.

The important point is not definition, but rather the expected conditions. Yet, the conditions I expect and indeed the conditions in the US right now (in aggregate) match deflationary scenarios, not inflationary ones.

I have highlighted Mish's arguments before and he is right on some Austrian economists who predicted significant inflation at this point.  But Chris Martenson at Zerohedge has a very interesting post refuting much of what Mish has said about the role of credit in inflation/deflation:

The second key deflationist assumption is that the supply of money plus credit will decrease. Central to this argument is the idea that it's insufficient to track the money supply alone and that it's essential to include the expansion (and/or contraction) of credit as well. This makes sense on the surface, because credit allows people to buy things and buying can translate into price pressures. More credit means more buying pressure; less equals the opposite.
But I have a number of difficulties with this view over the long-term. (Hey, credit has to be paid back at some point, right? So it's roughly neutral over the long haul.) This explanation is especially problematic for me when it is used in an overly broad way by lumping all credit market debt into a single spot and then saying, "There. Look. It's fallen. Credit is down, and that's deflationary."
The trouble I have with this view is that not all credit has the same impact on demand. Some credit leads to demand that directly impacts the CPI (inflation), and some does not. When we are talking about inflation, what most people care about is the price of things they use or consume (cars, food, gasoline, health care, houses, etc.), rather than financial instruments or paper assets (stocks, bonds, derivatives, etc.)
Let's put it this way: If you give someone a billion in dollars in credit, it matters significantly whether they go out and buy ten thousand silos of corn or one twentieth of the next ten-year Treasury bond auction. In the latter case, nothing much happens to everyone else's inflationary experience, but in the former case, the price of corn goes up.  A lot.
In other words, credit extended within and among the financial community mainly flows within and among the paper assets of the world, while non-financial credit goes to consumers, businesses, and governments that use the credit to buy real things.
[Note: One aspect of financial credit takes us to the world of shadow banking, where financial institutions and purely financially oriented participants buy and trade financial instruments generally just within and among themselves, often with tremendous leverage.]
Whether credit-default swaps (CDS), traded within and among the shadowy world of purely financially motivated entities, are trending up or down in price has almost zero impact on the price of molybdenum or corn. Therefore it is important for us to separate credit into its financial and non-financial components.
On this basis, if we look at total credit market debt broken out into its two main components (financial and non-financial), we see that instead of credit falling in general, it has fallen only in the financial world, but has climbed by an amount almost exactly offsetting it in the non-financial sectors:

Yes, financial-sector debt has fallen by $3 trillion, and that is a drag on total credit market debt, but as explained above, we wouldn't expect this to have much of an impact on inflation for anything other than paper assets. Non-financial debt, on the other hand...

...has rather steadily climbed uninterrupted before, during, and after the Great Recession. Credit market debt within the physically consumptive portion of the economy has climbed by nearly $3 trillion, almost perfectly offsetting the non-financial decline. But the offset is just an interesting observation that really tells us nothing about the inflationary or deflationary effect of credit expansion/contraction on the things that are tracked in the CPI.
So on the basis of credit alone, I find the deflationary argument to be weak.

From my own experience, I have yet to see deflation anywhere.  What I see is construction everywhere (at least in my own area) and have yet to see any slowdown.  But both arguments have merit but only the future will show who is right.

Not too much writing on this post, I am watching the teeth-grating debate.  Ron Paul has only been given one chance to speak so far while losers like Huntsman and Santorum have been given multiple chances.  You gotta love the blackballing.  Oh well, here are some pics that may cheer you up:

And on the topic of the presidential debate, with the exception of Ron Paul, this sums it up pretty well:

Update- The debate was, to say the least, aggravating beyond belief.  Despite Ron Paul polling in the top 3 consistently, he was virtually ignored.  Can't say I am surprised, Paul has the best chance of beating Obama compared to every other candidate so why wouldn't MSNBC marginalize?  Lew Rockwell, as always, sums it up perfectly:

MSNBC, which always seeks to marginalize Ron, attempts to disguise graphically the size of his victory in the post-debate online poll. During the pre-show, not one of the assembled shills even mentioned Ron, through they kept hyping the orange Huntsman. In the show, Ron was ignored on the Fed, the wars, and medical care, and his few questions were of this sort: "Why do you advocate the starvation of children by questioning LBJ the Magnificent's food-stamps program? You have 10 seconds to answer." And every time they thought Ron looked bad--when he was pulling papers out of his pocket, for example, while off-camera--they pulled back to show it. It was Soviet TV at its best, and reminded me--though I am fascinated by politics--that I hate it, too. It is a sham and a fraud that tries to demonize the only real peace and freedom candidate ever, and the only gentleman in the gutter game of elections. As to the Republicans in attendance, they gave their loudest cheers to the pro-life Perry's delight in executing hundreds of people.

Here are the Paul highlights in case you missed it:

I should also point out my favorite comment of the night from the financial punkosphere, via user "WestVillageIdiot" at Zerohedge: *warning on explicit language*

Right now I would take a grumpy old man over that "charismatic" fuckstick we currently have wandering the halls of the White House.

Disclaimer:  I never saw the charisma that made guys like Chris Matthews cum all over themselves.