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Austrian School Explanation, Other Debtly Matters


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What causes a boom and bust is excessive credit expansion and easy monetary policy which causes a boom and leads to inflation and higher interest rates. The Central bank then puts then traditional puts the brakes on to kill inflation anfd kills the economy and the stock market as a result.


We have not had the inflation and higher interest rates as there has been no inflation and thus no tightening monetary policy. Monetary policy has been easy and has lead to falling interest rates fuelling the housing boom.


The whole premise of the Austrian School is that ecomomic declines are caused by the MISALLOCATION OF CAPITAL.


Wall street has engaged in a truley gigantic misallocation of capital to businesess WHICH WILL NEVER RETURN THEIR COST OF CAPITAL.




Think of every tech company that spends $1 to produce 90 cents of sales.




America is an overmedicated overborrowed hollowed out superpower. Believe me I have no joy saying this. The peak of the american dream was the 1950's. It relies on keeping the consumption binge going by borrowing from the nations who now produce the REAL things the America used to produce but NOW ONLY CONSUMES.



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For those that were wondering about the total Debt give or take a couple of Trillion?




The Hypertiger explanation?


Central banks create debt (Capital) out of thin air with compound interest attached that is destroying its worth or returning it back into thin air?


The compound interest is not created?


Compound interest charged on capital created out of thin air is the root cause of and is a MISALLOCATION OF CAPITAL?




The Central banks and their partners in crime the commercial banks are fueled by compound interest charged on capital which they create out of thin air?


Root cause of Debt inflation is compound interest which everyone has to pay whether you borrow or not because the capital the central banks create out of thin air is the basis for the money supply?


Compound interest is deflating the entire money supply because it is not created it is attached


You have two options under such a system


Inflate debt or Die


You are forced to create debt and over consume or you die, not you specifically, everyone?


When you can not inflate debt anymore, debt deflation or the compound interest destroying the capital can not be prevented and it begins consuming the capital/debt/money which causes a contraction of the money/capital/debt supply?


There is only one way to stop debt deflation? inflate debt faster then the debt deflation or you default, declare bankruptcy, or die?


Fractional reserve banking is a misallocation of capital?


The AUSTRIAN SCHOOL is just using the blame the victim cover of misallocation to cover up or justify their sad devotion to the ancient religion of fractional reserve banking? or they are just idiots? If you make reserve requirements 100% remove compound interest attached to money/debt/capital created out of thin air you will bring Debt inflation under control and eliminate debt deflation or do what the central banks were created to do? "provide a stable money supply"? After 400 years of the modern fractional reserve banking system that would be real progress?


It would be one small step for man, one giant leap for mankind? But it?s too late for that because there isn?t an economist on the planet that can figure out how to prevent the giant leap off the cliff we have been set up for? Winners blame the losers and central banks are the winners by default every time? Debt backs up debt and lies back up lies?

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More debt discussion...impact on the dollar...


Record Debt Bad for the Market

2/21/2003 12:25 PM ET

Scheaffers Research


Yesterday, the U.S. Department of Commerce released its December trade balance data. It was far worse than estimated, with the trade deficit surging to a record high of $44.2 billion. For the year 2002, the United States incurred a record deficit of $435.2 billion.




Also yesterday, the federal government ran into its debt limit for the second time in less than a year. The Treasury Department will ask Congress to raise the borrowing limit from the recently increased level of $6.4 trillion. Given that it would be disastrous for the United States to default on its debt obligation, the smart money says the limit will probably rise.

... Read More

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doc, many tanks for monster style good link!








no comments, charts do speak for themselves. I say it agaion: In a bull market there si the guy who says "dow 36k" in a bear market thee is trhe guy who says "armageddon is near". THAT IS MASS PSYCHOLOGY.

We can have even 2 decades of this bear market, but those who count on Dow at 1000 could go thru a nightmare.

I for myself draw the conclusion form the current bear market, that with stocks there is just not much money to be made in comming 10 or 20 years, but well, we had such a time not long ago, it was between 1966-1982.

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For those that were wondering about the total Debt give or take a couple of Trillion?




The Hypertiger explanation?


Central banks create debt (Capital) out of thin air with compound interest attached that is destroying its worth or returning it back into thin air?


The compound interest is not created?


Compound interest charged on capital created out of thin air is the root cause of and is a MISALLOCATION OF CAPITAL?

Your compound interest model assumes that the wealth of individuals and nations is constant - that wealth cannot be created.


However, unlike matter, there is no "law of the conservation of wealth".


Compound interest, ie., usuary, was prohibited by the church during the dark, middle, ages. These societies were essentially stagnant and static.


A few people sat on their gold and hoarded it and the rest spent their lives up to their eyeballs in sh*t.


With the advent of the Renaissance, came the idea of fiducial, gold-backed, currency and usuary became more accepted. People were willing to loan ie., rent out, their money to new ventures in exchange for interest.


Wealth was no longer something one simple sat on, but something one "rented out". Other could now borrow this wealth and take a chance to improve their own lot.


It's no coincidence that the greatest and most rapid rise in material prosperity occurred in those cities and then nations that adopted this system. Venice, Florence, Holland, Germany, Sweden, England, the United States, Japan, Korea, and now China.


If your model was correct, then the islamic nations should be the most prosperous on earth. Islamic banking still prohibits compound interest. The reality is that they, along with sub-Saharan Africa, are one of the few parts of the world where the standard of living has been falling since WWII.


The one exception that comes to mind is Malaysia. But their prosperity is entirely due to to the large ethnic Chinese population who do charge each other interest. They borrow money, start business, take a chance, prosper, and create wealth. And take part of the profits and pay back the principal and interest of the loan.


In conclusion, the evidence suggests that your analysis of compound interest is flawed.


The dislike of compound interest amongts some people is a cultural meme that persists from the Dark Ages. "My daughter, my ducats".


On the other hand, fractional reserve banking is an inherently unstable system. This however, is due to it's fractional nature, rather than the compound interest charged.

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The whole premise of the Austrian School is that ecomomic declines are caused by the MISALLOCATION OF CAPITAL.


Wall street has engaged in a truley gigantic misallocation of capital to businesess WHICH WILL NEVER RETURN THEIR COST OF CAPITAL.

Several months ago, Quest took a $10,200,000,000.00 (10.2 billion, it just gets your attention with all those zeros) write off for equipment they buried in the ground and will NEVER use.


I would say this was truely a MISALLOCATION OF CAPITAL.


Maybe Easy Al would call it the productivity miricle.

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deep blue sea,


great post, tanks!



during the nasdaq bubble there was a gigantomaniac misallocation of capital going on, which had effects also on other parts of the economy.


Because of that misallocation we are witnessing one of the bigger bear markets in history. The japanese real estate bubble in the 80s was also a gigantomaniac misallocation of capital, it was so unbelievable monster style, it was maybe even worse than the nasdaq bubble, but i dunno exactly. Becasue of that bubble, nikkei is in a bear market since 12 years.


So people shouldnt expect the next bull market around the corner. It is even quite likely that there will be no nasdaq anymore in a few years. That will be because firms run out of capital, because capital lenders are not willing to make another "misallocation of capital", so no more money for little shit firms on the nasdaq. The bigger firms will move to NYSE, like Doc says since a long time.


What is going on right now, and what will possibly come in the years to come, is quite good to explain with Schumpeters approach. There are many idiots who became porfessors for economy, but Schumpeter wasnt one of them, maybe Friedman is :lol:

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So sad. So many still don't get it. Keep swinging Hyper. It is very difficult to imagine a world radically different from our current experience, but nothing lasts forever. Especially when that nothing is fiat.

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While we're overcomplicating things, let's also realize that what is commonly referred to as "economic growth" in modern parlance, often isn't. I think it better resembles a simple organic struggle for survival. "Cancerous" growth might be a more apt term.


I've often marveled at the modern sales culture we live in. Most modern corporations maintain a sales organization of some sort, be it direct or outsourced. These peoples' job is to go to the "customer base" and influence them into buying something, quarter after quarter, year after year. WTF? Are the customers incapable of determining what they need and when they need it? Why is this a pull process and not a push process? (I'm painting with a broad brush, admittedly)


Under a fractional-reserve fiat banking society, in order to pay back the compund interest, by definition requires a person (company) to "innovate" - to create "relevant" products, deliver relevant services, entertain in a relevant way, steal, lie, cheat, whatever it takes to get some of someone else's borrowed money to pay the principal and interest on one's own previously borrowed funds, or to just simply pay the bills for current consumption (like this broadband connection).


Without a doubt, this process has led to the development all of the modern conveniences and technology we enjoy today. And for those periods of time when the "material standard of living" is visibly improving across the majority of the population, it is certainly believed that a fractional fiat system is a darn good thing, in fact it isn't even given a second thought.


But, at what point does the material standard of living reach maxout? When is 1G wireless good enough, and >1G just plain frivoulous by comparison? When is a 2000 sq. ft. home in the burbs just as good as a 6000 sq. ft.? When has the majority of feasible wealth already been created? When is the populace satiated, and too overburdened with "overhung fractional fiat debt" (better known as "negative sentiment" - if you will, a sort of a LaPlace transform from the monetary realm to the psychological realm) to keep up the prior pace of growth? When does the fractional fiat system create mostly debt and little "material advancement" that anyone finds valuable? What are the consequences of such a scenario? (For you engineer types, there must be some cool multi-factor optimization studies that could be done in here somewhere :)


At some point in the human past, for whatever reason (probably due to some humans wanting to exercise power and control over others, or maybe it was just simple human laziness), it was determined by society that humans must "do", rather than just "be". Instead of feeding and sheltering oneself, and that being the full extent of "the economy", specialization became the model. Division of labor economy. Whether fractional reserve banking drove this model or grew from it, is not clear to me and is probably not relevant. The net result in any case was that "non-essential" technologies came to life as more and more people needed to find ways to Do, and not just Be.


Today our economy is horribly out-of-round. Economic participants always seem to be on the same side of the boat as each other. Everyone is re-fi'ing their homes at the same time. The interest-rate mechanism so integral to the capitalist model, is horribly broken. It is incapable of balancing the supply of and demand for capital. Instead of a vast, diverse ("random") economic panoply, we have sameness and conformity. When a rotating machine is out of balance (say like a washer or dryer or engine), if not repaired, it will simply destroy itself, or at least fall into disrepair, given time.


In much the same way, the fractional-fiat system has put human nature out of balance with respect to time. The good things about humankind have been aggregated together in time - eras of innovation, invention, peace, progress, cooperation, harmony and joy. "Euphoria". But so have the bad aspects - jealousy, anger, hatred, war, divisiveness, destruction, pain. "Despair". Instead of temporally permanent balance and randomness ("moderation") in human affairs, we have alternating eras of extremes. The monetary regime of "one must do, not be, in order to live" is the metronome.


Humans, being of limited vision and perception, are especially vulnerable to these extremes. They think when times are good, they'll be good forever, and act accordingly...which only ensures the down phase of the cycle will only be that much more severe - too many promises made, but not enough resources on our fragile planet to make good. And while approaching the trough, the response is that the bad times will only get worse..and you bet, humans will act accordingly. This is where truly atrocious things can occur.


I see the fractional fiat system as the conductor in a schizoid symphony. Sometimes the music is rousing, other times......


All we can be sure of is that the cycle will repeat over long enough periods of time, but like the Tacoma Narrows Bridge, do the stresses at some point simply tear the machine apart?

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"Fractional fiat system".


There is no a priori reason a fractional system has to be fiat.


For most of the reign of the pound sterling the system in place was

fractional fiducial. The pound sterling was backed by precious metal.

This was an era characterized by rapid economic growth combined with preservation of real buying power.


One of the major reason for underdevelopment in most countries of the world today is the lack of a functioning fractional system. The oligarchies sit on their wealth or consume it in non-productive ways. It's exceptionally difficult for the average citizen to 1) borrow money to start a new venture to improve his/her lot and 2) affort the bribes demanded by the myriad of bureaucrats in order to the large number of official approvals required to start any new venture.


Point 2 is in part a symptom of point 1.


On the other hand, throughout history all fiat system have ended in debasement of the purchasing power of the fiat currency and hyper-inflation.

No gov't, including the current US gov't, has been able to resist the temptation to just print more.

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