Welcome

Let`s start this endeavor with a simple definition: A blog is a web-site on which an individual or group of users record opinions, information, etc. on a regular basis.

Now, there are thousands and thousands of individuals or group of users that spew out all sort of garbage on the blogosphere so the question you, dear reader, should ask yourself is this; “why should I spend time on this particular blog?”

That is the question your humble writer will try to answer by constantly challenging your established worldview and thus prompting intellectual discourse. Admittedly, there is also a great deal of self interest in this project as it will help structure thoughts and refine viewpoints.

Before starting the very first blog post it would be in its place to explain why the site is dedicated to the great Austrian economist Eugen von Böhm-Bawerk. Böhm-Bawerk wrote extensively on capital theory. His magnum opus was actually called Capital and Interest and needless to say, it is his writings on capital theory that underpin the analysis that will be provided here and as such make Bawerk.net rather unique relative to all the Keynesian and Monetarist quackery you will encounter.

In today`s world, intellectuals have completely disregarded the importance of capital in an economic system and consequently become hapless Krugmanties with sole focus on aggregates. Their whole concept of an economy is simply two very big aggregates that need to be balanced through centrally planned management. If aggregate supply in any sense is larger than aggregate demand we need to fine-tune the system with mathematically precision. Paul Krugman, Mario Draghi, Jacob Joseph Lew, Haruhiko Kuroda and Benny Shalom Bernanke belong to a tiny elite blessed with omniscient powers to know exactly what the price of a Portuguese five year bond ought to be at any given time. If it is anything but, then more fine-tuning is in its place.

What Böhm-Bawerk as early as the 1880s showed us is the importance of disaggregates, namely the capital structure of an economy. His theories were later refined by Ludwig von Mises, Friedrich von Hayek and Murray Rothbard, but the credit for a solid breakthrough in capital based economic theory lay squarely with Eugen von Böhm-Bawerk. Therefore, this blog will be in his name.

And with that introduction it seem proper to start with some comments on the perversion our omnipresent masters call the capital market.

A capital market will through the objective standard of pricing allocate resources to their highest bidder. The highest bidder will always be the most productive user of said capital as a direct implication of Say`s Law, stating that supply creates its own demand. Any use of a generally accepted medium of exchange is exactly that, a medium of exchange, nothing more and nothing less. Effective demand comes from production. However, our masters does not like to work, so through history they came up with an elaborate scheme to extract wealth (demand) without first producing equal value. It is called centralized money creation and fractional reserve banking. With it, they can decouple production and consumption and only in that sense is money the root of all evil – capital distortions, bubbles, depressions and the untold misery borne by the clueless middle class worker who lost his job and then his productive power to express effective demand is the fault of our monetary masters!

The next step was of course to infect capital markets with this sort of fraudulent behavior and more than anywhere else has the market for loanable funds been affected.

In order to take on debt before the age of fiat money one had to build up credit beforehand! Now banks give you credit, which should be enough proof of gross perversion. Do not get the argument wrong, it does not imply anything wrongdoing in taking on debt. On the contrary, pooling resources in capital markets can be a very efficient way to grow a business and hence an economy. It is when said debt is directed toward consumption of capital it becomes problematic. Consumer- and government credit withdraws capital, consumes it, and subsequently reduces the ability to increase production in the future. The destructive nature of consumptive credit acts as a tax on future productivity. To make the perversion complete, the very nature of systemic capital consumption will at some point render debt service impossible precisely because the taxed productivity that the credit is issued against will never materialize. Witness the desperate lack of quality collateral in today`s markets for proof.

A couple of charts from the US market will help substantiate the argument. Assume “good debt” to be business loans with intent to increase future production, further assume bad debt to be financial sector- and foreign debt plus household debt excluding consumer credit. A third category is pure destructive debt, such as outstanding owed by governments and consumers. Charting these three categories of debt reveals something staggering: Bad and destructive debt explodes with the end of Bretton-Woods, while the “good” component remains stable. Even worse, after the capital structure could no longer sustain this level of madness and collapsed in 2008, the resulting bail-outs substituted bad debt for destructive debt!

Source: Bureau of Economic Analysis (BEA), Federal Reserve Flow of Funds Accounts (Fed)

Note to reader: Gross domestic production (GDP) measures money outlays over a given period and deflates it with an arbitrary index to arrive at real GDP. We will refer to it as gross domestic consumption (GDC) as this is much more accurate in terms of the underlying methodology used to compile this statistic.

The last point that needs to be made before we conclude is the consequences on capital efficiency. The R&R debate has focused solely on public debt, but this is too narrow. All debt matters and the composition can render its effect on productivity either beneficial or detrimental. While the GDC term is sub-optimal to say the least, it is all we have in order to assess historical prosperity of a nation. The relationship between debt and GDC should in theory tell us something about the marginal productivity of that very same debt accumulation. The next chart shows you the development for the US on a 16-quarter moving average:

Source: Bureau of Economic Analysis (BEA), Federal Reserve Flow of Funds Accounts (Fed)

Even if we disregard the last couple of years it does not look promising as it takes ever more debt just to maintain a constant level of consumption. A major correction is definitely coming! What about the rest of the world? Total credit market debt statistics is fiendishly difficult to come by, they do exists for some countries, which provide us with a metric for comparison: the same folly has been going on across the globe!

Source: McKinsey Global Institute (MGI), International Monetary Fund (IMF)

Conclusion

The rapid accumulation of capital consuming debt has taxed away a large portion of future productivity, not only in the western “developed” economies, but also from the ones that cater to any form of unsustainable consumption. This will manifest itself in several ways, but the two most obvious is of course the long, slow decimation of the western middle class in terms of stagnant/falling real wages and ever higher debt loads (road to serfdom anyone?) and secondly in terms of more and deeper financial crisis as a highly leveraged system lacks quality collateral to maintain that leverage.

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