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Eugen von Böhm-Bawerk

Eugen von Böhm Bawerk

Eugen Böhm Ritter von Bawerk was the Austrian Minister of Finance intermittently from 1895 to 1904, and also wrote a series of extensive critiques of Marxism. “Value does not come out of the workshop, but out of the wants that goods satisfy” The quote by Mr Eugen von Böhm-Bawerk is as true today as it was more than 100 years ago. This blog is not an attempt to revive mr Böhm-Bawerks thoughts, life and deeds, but from a sober view of the world comment on and analyze ongoing events.

Articles by Eugen von Böhm Bawerk

Necessity is the Mother of Invention – Retirees Desperate Reach for Yield

June 9, 2017

Ben Bernanke’s creativity inspired a generation of economists and central bankers. QE, ZIRP and NIRP established a new class of economics that is mathematically sound but practically disastrous. Billions of dollars were transferred from savers to investors to boost the economy, but the wizards of quant forgot that something has to give. In this case, it was the formation of a pension crisis that threatens the golden years of millions of retirees across the world. None of the econometrics models provide a solution for the growing gap in pension funding, other than unsustainable debt accumulation.
Creativity cascaded to the less sophisticated pension fund managers. In a desperate reach for yields they increased exposure to project

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The Nature and Origin of Subjective Value

May 25, 2017

[This article is excerpted from The Positive Theory of Capital, book 3, chapter 2, “Nature and Origin of Subjective Value.”] Reprinted from Mises.org
All goods without exception — indeed according to the very conception of them as “good” — possess a certain relation to human well-being. There are, however, two essentially distinct grades of this relation. A good belongs to the lower grade when it possesses the general capacity to subserve human weal. The higher grade, on the other hand, demands that a good should be more than merely a sufficient cause; it must be an indispensable condition of human well-being — a condition of such a kind that some gratification stands or falls with the having or wanting of the good. In the expressive vocabulary of everyday life we find a separate

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Chinese Philosopher Kings, Losing their Yuan FX Religion?

January 3, 2017

It took a while, but the world are slowly coming to grips with the simple fact that the red-suzerains in Beijing are not the infallible leaders en route to a new superior economic model as they thought they were. All the craze that emanated from the spurious work of Joshua Cooper Ramo, which eventually led to works like “How China’s Authoritarian Model Will Dominate the Twenty-First Century,” are slowly catching up to reality. We never bought into it and our prediction for 2017 is that most of the pundits commenting on the red Dragon will realize how bad the situation in China really is.  That being said, there were still Japan-bulls in the late 1990s that still believed Japan would eventually become the largest economy on the planet and dominate the world. If we are right, the heliocentric worldview China apparently is taking will quickly turn geocentric, just as it is about to do in the western world. Domestic problems will engulf the leadership in Beijing, and there will be less time to squabble over petty reefs in the South China Sea. The danger is obviously that the political establishment in China will be in dire need to distract the hordes of angry masses that are about to lose their life savings.

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How to Invest in the New World Order

December 26, 2016

In our latest Toward a New World Order, Part III we ended by promising to look closer at investment implications from the political and economic shift we currently find ourselves in; and that story must begin with the dollar. While known to the investing public for years, the Bank of International Settlements (BIS) recently acknowledge that the real risk-off / risk-on metric in global markets is the dollar and nothing else.
In the chart below, which we recreated from an absolute brilliant presentation by Macro Intelligence 2 Partners via RealVision-TV, we see the potential scale of the coming “dollar-problem”.  The dollar moves in cycles as most things. The lower extreme around 84, only broken when Bernanke pushed through QE2, means financial conditions for emerging markets and other commodity producing economies have gotten so out of hand that conventional risk-metrics finally lead investors to pull back. The trigger, as can be seen in the chart, is often policy driven, but the underlying structural imbalance has been building for years, if not decades, prior.
Before we move on it is of utmost importance to understand that many of the dollar liabilities accumulated outside the United States are not backed by actual dollars, but are rather claims to dollar proper.

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Toward A New World Order, part III

December 17, 2016

A new world order is coming of age and the transition is painful to accept for a Western middle class with a deep-seated sense of entitlement. We showed how the West feels threatened globally in Toward a New World Order and followed up explaining how this translate into domestic politics in Toward a New World Order Part II. We will now continue this series by showing how gross economic mismanagement have created the new political class that we described in part two. As we stated back then, a large and increasing part of the electorate, swayed by neither the political correct socialist/feminist/cultural relativist dogma presented by the left, nor the lip service paid to free markets by a corrupted right, have taken hold in western democracies. They form a directionless blob of potential voters which until recently have drifted aimlessly along the political spectrum. Now they have made up their mind and it is proving pundits clueless as to what is going on. The “worker” making millions on Wall Street or by helping Google refine their search engine is not the same “worker” we find in flyover America. The young billionaire making apps to entertain confused millennials and snowflakes is not the same capitalist as the shale oil investor we might encounter in North Dakota.

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Toward a New World Order, part II

November 11, 2016

One of the most widespread misconceptions in the realm of politics is the notion of a left-right axis. This has been used over and over to explain political outcomes and paint the various factions as polar opposites. For example, in the US the two main parties, the Republicans (right) and Democrats (left), are often portrayed as a fight between good and evil. Which party representing good and which one is advocates of evil is highly subjective and obviously, “our” team is always considered good, while “they” are evil. Then there are factions to the right and left of mainstream parties which are then considered extreme versions of left and right. To the right of right-of-center you find somewhat confusing a hodgepodge of various totally unrelated groupings such free-market libertarians, racists and fascists. On the left of left-of-center we find the usual socialists and communists.
This makes very little sense and as we have shown on these pages earlier, the chart below gives a much better description of the political reality. Libertarians are the polar opposite of fascists, but the left-right axis bundle them together on the far right side. By doing so libertarians are easy to dismiss as simple-minded racists.

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Toward a New World Order?

November 10, 2016

A Brave New World is coming? Perhaps. We had a recent discussion with a group of people in the hopeless business of doing long term forecasting. This made us think about what the world will look like over the next 20 to 40 years. A pretty thankless task, but the bottom line is without a damn good war, Asia will be the way of the future.
As an experiment, assume, as most long term forecasters do, that both Europe and the US have reached a mature plateau where growth will average around 1.5 to 2 per cent over the long term, while China will slowly decelerate from the current 6.5 to 3 per cent and India from today`s 7 to around 4. In this scenario (which we do not necessarily believe in, as China is up for en epic crash) what will be the share of global GDP by, say, 2060? And what are the geopolitical implications?
Using data from Angus Maddison, the IMF and then extrapolating with our simple assumptions (which are just as good as any) we get the following picture.  In international dollar terms (PPP) China is already the world largest economy. By 2060, under the abovementioned assumptions, China will constitute almost 30 per cent of global GDP, almost reaching the level Western Europe had when establishing the European dominance over the world. The US and Europe will both be less than 10 per cent of the world economy.

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“Subtle forward guidance”: The marriage between best practice central banking and commodity markets

October 19, 2016

In the years following the 2008 crash and today, the use of forward guidance from central banking policy makers has become increasingly important. What this nonsense ultimately has translated into is a ridiculous track record in posting upbeat assessments on the economic environment, aimed at trying to fool the marginal investor into believing “there are no need for worry, central bankers have everything under control”. Unsurprisingly, as with all psychological conditioning, forward guidance have lost its effect as more and more market participants lose confidence in central banks and their promise that everything will eventually mean revert to happier days. Contrary to what the smartest people on the planet are saying. Fool me once, shame on you, fool me twice shame on me.
This unfortunate practice is making in-roads into the most important of commodity markets: crude oil. Ever since the last QE taper in June 2014 triggered a dollar rally and a corresponding crash in oil prices, OPEC has been struggling to find its role in this new normal. Market power has, with the emergence of QE and ZIRP/NIRP, been moved to a different set of central planners than themselves, namely those controlling the flow of credit into and around the system.

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USD ready for a second leg higher – then what?

October 15, 2016

One year ago we showed the following chart to explain the relative strong dollar that was on everyone’s mind at the time. With a second leg higher in the US dollar imminent, this particular chart will be more important than ever. Claims to dollars, such as demand and time deposits, or even more opaque money-like products created by the shadow banking system is just that, a claim or derivative on the final mean of payment, namely base money. When trust breaks down and owners of dollar claims rush to exchange them for actual dollars, the price of dollars goes up in relation to goods and services because there are not enough dollars to satisfy all the claims outstanding. In monetary terms deflation takes hold and there are no market mechanism that can clear this anomaly (because it was never a proper market to begin with) as the price of the underlying and the derivative will move in perfect proportion to each other. In enter the Federal Reserve with their QE programs, id est base money creation, to meet dollar demand and stem the ensuing panic.
Unfortunately, something even more sinister has been going on with dollar derivatives internationally. In addition to domestic claims to dollars, there are a massive market for dollars internationally called Eurodollars.

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Do our money managers really believe this will end well?

October 6, 2016

An economic bubble is essentially an economic activity that cannot sustain itself without a continuous influx of new money and credit to bid away real resources from self-funding endeavors. Financial bubbles are obviously closely related as financial assets are derivatives of underlying real production of goods and services. For example, an Apple stock is a derivative of the economic good emanating from peoples use of their cell phones. If the value placed on the services rendered from their product is high, the financial asset should reflect this through a high share price.
Aggregating this concept to include all assets and all production does not change the conclusion; valuations must reflect output somehow. In other words, there should be a causal connection between the value of assets and their ability to create output.
Quantitatively we can express this relationship by looking at  the “Household Net Worth” time-series found in the Financial Accounts of the United States, compiled by the Federal Reserve (source) and nominal GDP as reported by the Bureau of Economic Research (source).

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The Road to Fascism in Just Two Charts

September 18, 2016

Laws of politics have been turned upside down. The Intellectuals Yet Idiots can make no sense of it. The underdog who ‘tell it how it is’ appeal to people while established reasoning does not.  Politicians used to pit people against each other and bribe key electoral groupings with the spoils of ‘democratic’ victory to maintain power; well aware that the “…[process] will [only] endure until the day [politicians] discovers that it can bribe the public with the public’s money.” From that day onwards, western democracies have been on a slippery slope as the state consumes and redistributes ever more of society’s productive capital. When taxes became exploitative, the state went into debt. When workers’ real wages stagnated, the central bank subsidized further indebtness. Generations of capital accumulation prior allowed this monstrosity to continue for decades; blurring cause and effect. When the debt machine stalled in 2008, people started to feel something was seriously wrong with the system. Political hacks with their old tricks could no longer bribe and lie because people started blaming them for the hardship. However, years of indoctrination under the auspice of political correctness left the constituency unable to express their feelings. Self-declared besserwissers with fancy Ph.D.

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Why A Crisis Is Coming—–Two Charts Which Explain It All

September 3, 2016

The great “science” of economics once discovered an empirical relationship between GDP and unemployment that has been dubbed Okun’s Law. It simply states that the unemployment rate rises as GDP contracts, or vice versa, as production shrinks less people will be employed. It is not exactly rocket science.
However, this made us think about another relationship we have observed lately. US government real tax receipts have been trending downwards while employment has kept up remarkably well. If we draw a chart of US withholding taxes (smoothed from all the short-term noise) and overlay that with employment growth, we find a worrisome divergence that has historically not been there.
[embedded content]
If we plot the same chart, but using annual change in real GDP instead of the annual employment growth, everything seem to fall into place though.
What can explain this dichotomy? The most obvious explanation is the increased employment of low paid workers with lower productivity relative to what we have seen in previous recoveries. Substituting $50 – 100k  full time breadwinner jobs with barmaids and waiters is certain to drive down wages (and hence taxes) and GDP as the marginal productivity of each additional new hire is lower than the previous. Both productivity statistics and the monthly labour market report substantiates our view.

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Two Simple Charts Explaining Everything

September 3, 2016

The great “science” of economics once discovered an empirical relationship between GDP and unemployment that has been dubbed Okun’s Law. It simply states that the unemployment rate rises as GDP contracts, or vice versa, as production shrinks less people will be employed. It is not exactly rocket science.
However, this made us think about another relationship we have observed lately. US government real tax receipts have been trending downwards while employment has kept up remarkably well. If we draw a chart of US withholding taxes (smoothed from all the short-term noise) and overlay that with employment growth, we find a worrisome divergence that has historically not been there.
If we plot the same chart, but using annual change in real GDP instead of the annual employment growth, everything seem to fall into place though.
What can explain this dichotomy? The most obvious explanation is the increased employment of low paid workers with lower productivity relative to what we have seen in previous recoveries. Substituting $50 – 100k  full time breadwinner jobs with barmaids and waiters is certain to drive down wages (and hence taxes) and GDP as the marginal productivity of each additional new hire is lower than the previous. Both productivity statistics and the monthly labour market report substantiates our view.

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Mission Creep – How the Fed will justify maintaining its excessive balance sheet

August 29, 2016

FOMC have changed their normalizing strategy several times and we now see the contours of yet another shift. The Federal Reserve was supposed to reduce its elevated balance sheet before moving interest higher as it would be impossible to increase the fed funds rate in the old fashioned way when the market was saturated with trillions of dollars in excess reserves. When it finally dawned on the FOMC that selling large quantities of TSY and MBS into the market was probably not a very bright idea, they created the O/N RRP to be able to raise rates without draining the financial system of reserves beforehand. Still, the thought of selling, or more accurately not rolling over, trillions worth of government debt, when SWF’s and foreign FX managers are desperate to raise USD is still not something the FOMC even want to contemplate.
So a case needs to be built for the FOMC to justify maintaining its bloated balance sheet indefinitely; conveniently enough ex-FOMC member Jeremy Stein with his Harvard colleagues Robin Greenwood and Samuel Hanson did just that in a paper called “The Federal Reserve’s Balance Sheet as a Financial-Stability Tool” presented at the Jackson Hole Symposium.
Their argument is simple.

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The Dos Santos Succession Saga

August 21, 2016

Arguably one of the easier calls for us to make after 37 years in power was that President dos Santos would find ways of affording himself another 5 years in. Like any ‘effective’ leader, Mr. Santos made sure the final deal to do just that was stitched up long before the Party Congress formally convenes in Luanda, with a lower level MPLA ‘Central Committee’ already rubber stamping his name in mid-August. That also happened to be alongside large numbers of newly minted committee members, all loyal to the Santos clan (including family relations no less) to secure his overall patronage base. All that now remains is the relatively trivial issue of winning the actual 2017 Presidential election, where Santos maintains a monopoly over all MPLA power and positions via rigged PR lists. For most observers it’s pretty tempting to stop writing about Luanda there as an ‘open-closed’ Santos case, but the real political subplot to watch next year is who actually wins the Vice Presidential nomination alongside Mr. Santos. Why? Because it plays directly into longer term succession plans. The ‘official line’ – at least for those who buy it – is rather than seeing out another full term to 2022, Santos will step down in 2018, passing the baton to the new VP. After nearly 40 years of Santos sclerosis, Angola finally turns the corner.

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The Road to Stagflation—–The Case Of Norway

August 19, 2016

BY EUGEN VON BÖHM-BAWERK
We have all heard the incredible stories of housing riches in commodity producing hotspots such as Western Australia and Canada. People have become millionaires simply by leveraging up and holding on to properties. These are the beneficiaries of a global money-printing spree that pre-dates the financial crisis by decades. The road toward such outsized gains in property is not paved with some global savings glut concocted by theoretical economists, but have rather been a process whereby the US leveraged up its economy-wide asset base allowing the Chinese to print ‘dollars’ with abandon. China, being a top-down system favoured fix asset investments as a means to grow their economy; the newly minted ‘dollars’ were thus used to bid on international commodities. That this increased the nominal values of tangibles, especially commodities with a direct Chinese bid, should come as no surprise. However, now that the Chinese economy is trying to move away from a system based on slave labour, foreign direct investment and exports to an overleveraged world, fixed asset investment growth is slowing down. That this has negatively affected Perth and Calgary is clearly visible in property data. However, one stalwart bubble remain resolute in all of this.

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Toward Stagflation

August 19, 2016

We have all heard the incredible stories of housing riches in commodity producing hotspots such as Western Australia and Canada. People have become millionaires simply by leveraging up and holding on to properties. These are the beneficiaries of a global money-printing spree that pre-dates the financial crisis by decades. The road toward such outsized gains in property is not paved with some global savings glut concocted by theoretical economists, but have rather been a process whereby the US leveraged up its economy-wide asset base allowing the Chinese to print ‘dollars’ with abandon. China, being a top-down system favoured fix asset investments as a means to grow their economy; the newly minted ‘dollars’ were thus used to bid on international commodities. That this increased the nominal values of tangibles, especially commodities with a direct Chinese bid, should come as no surprise. However, now that the Chinese economy is trying to move away from a system based on slave labour, foreign direct investment and exports to an overleveraged world, fixed asset investment growth is slowing down. That this has negatively affected Perth and Calgary is clearly visible in property data. However, one stalwart bubble remain resolute in all of this.

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Stupid is What Stupid Does –—- Secular Stagnation Redux

August 17, 2016

By EUGEN VON BÖHM-BAWERK
Which country, the United States or Japan, have had the fastest GDP growth rate since the financial crisis? Due to Japan’s bad reputation as a stagnant, debt ridden, central bank dependent, demographic basket case the question appears superfluous. The answer seemed so obvious to us that we haven’t really bothered looking into it until one day we started thinking about the demographic situation in the two countries. As we all know, Japan has a rapidly ageing population whereby the workforce is getting smaller for every day. Japan has had a demographic growth tax ever since 1997 when population growth overtook potential labour force growth.
The United States on the other hand only started “paying” their demographic tax in 2010 and it was not until very recently it became severe enough to make a large dent in overall growth accounting. 
If we adjust for the demographic difference between the US and Japan, the Japanese economy has actually performed much better than the US. In other words, given the resources available, Japan has managed to eke out more real growth than the US. That is not to say Japan is growing on a healthy pace, only that they are able to grow faster (or fall less rapidly) than their potential workforce.

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Stupid is What Stupid Does – Secular Stagnation Redux

August 17, 2016

Which country, the United States or Japan, have had the fastest GDP growth rate since the financial crisis? Due to Japan’s bad reputation as a stagnant, debt ridden, central bank dependent, demographic basket case the question appears superfluous. The answer seemed so obvious to us that we haven’t really bothered looking into it until one day we started thinking about the demographic situation in the two countries. As we all know, Japan has a rapidly ageing population whereby the workforce is getting smaller for every day. Japan has had a demographic growth tax ever since 1997 when population growth overtook potential labour force growth.
The United States on the other hand only started “paying” their demographic tax in 2010 and it was not until very recently it became severe enough to make a large dent in overall growth accounting. 
If we adjust for the demographic difference between the US and Japan, the Japanese economy has actually performed much better than the US. In other words, given the resources available, Japan has managed to eke out more real growth than the US. That is not to say Japan is growing on a healthy pace, only that they are able to grow faster (or fall less rapidly) than their potential workforce.

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Turkish Turmoil: Let the Politics Begin

August 16, 2016

A month on from Turkey’s failed coup attempt, and you’ll find endless op-eds opining the supposed strategic implications of Erdogan’s rear-guard offensives. In a nutshell, it breaks down into four key arguments. The first is that Erdogan will oversee a ‘brutal crackdown’ to consolidate power wherever and whenever possible out to 2019 against any form of political opposition (Gulenist or not). The net result supposedly secures Erdogan’s tenure towards 2023 ‘Ataturk’ landmarks, and beyond. The second facet is that Mr. Erdogan will continue to inflict collateral Kurdish damage to secure internal gains along the way. PKK-Ankara relations basically go back to square one, while the slightly more politically savvy HDP gets caught in Erdogan’s crossfire, undermining consistent Kurdish supplies through Turkey. The third factor is Ankara turning towards Russia as a new ‘strategic’ axis against NATO interests, and indeed Turkey’s vexed relations with the transatlantic military body. A relationship that’s likely to go from bad to worse given Mr. Erdogan’s underlying belief that ISIS gains remain the lesser of two evils compared to Kurdish consolidation on his Southern border. Not to mention the minor fact that most AKP members think the US was all in on the ‘Gulenist’ plot to oust the sitting President.

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The FOMC Butterfly that Will Ruin the World

July 29, 2016

BY EUGEN VON BÖHM-BAWERK
Imagine the financial crisis knocked you out and you did not wake up from the coma that followed until this day. Then, presented with the following three charts you were asked to guess where the federal funds rate was trading. Given the fact that
the core CPI is on a steep uptrend and currently over the arbitrarily set 2 per cent target;
unemployment below what the FOMC regards as full employment and;
GDP running at a rate far above the Federal Reserve’s own estimates of so-called potential;
we are certain most people would say the Federal Reserve, still very much data dependent (yes, that is what they claim), would be responsible enough to have lifted the rate far above its long term average to maintain positive real rates in order to cool down the economy. This is what modern Keynesianism- and Monetarism teaches the zealous acolytes populating the world central banks after all.  In short, you would say the Federal Funds rate would be in the vicinity of five per cent.

Being told the Federal Funds rate is close to the zero lower bound (which turned out to be no bound after all) you may enquire as to whether the Federal Reserve had just slashed rates to fend off an imminent recession.

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Brexit or not, the pound will crash

July 15, 2016

Status quo, as our generation know it, established in 1945 has plodded along ever since. It is true that it have had near death experiences several times, especially in August 1971 when the world almost lost faith in the global reserve currency and in 2008 when the fractional reserve Ponzi nearly consumed itself. While the recent Brexit vote seem to be just another near death experience we believe it says something more fundamental about the world.
When the 1945 new world order came into existence, its architects built it on a shaky foundation based on statists Keynesian principles. It was clearly unsustainable from the get-go, but as long as living standards rose, no one seemed to notice or care. The global elite managed to resurrect a dying system in the 1970s by giving its people something for nothing. Debt accumulation collateralized by rising asset values became a substitute for productivity and wage increases. While people could no longer afford to pay for their health care, education, house or car through savings they kept on voting for the incumbents (no, there is no difference between center left and right) since friendly bankers were more than willing to make up the difference.
It is clear for all to see but the Ph.Ds.

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Signs Of Stress In Draghi-Land——–Target2 Imbalances Close To Record Levels

June 30, 2016

Money, generally accepted medium of exchange, acts as a veil that confuse and blurs economic relations. This is especially true when it comes to intertemporal considerations. Whilst probably the most important institution in a free market, money can be highly destructive when politicized. Why? Because politics is about power and distribution of real wealth. And since money affect almost every single transaction, politics can span throughout society with ease when in control of money. Amchel Rothschild was spot on when he allegedly said “[g]ive me control of a nation’s money supply, and I care not who makes its laws.” Power over money is power over people and power over people is, well, pure power. Money is thus the most sacred tool in a statist’s toolbox and has become instrumental in their quest to control society and allocate resources as they see fit.
It is within this context the monstrosity called the euro need to be analyzed. By pooling Western European countries within the realm of one central bank, power over people increases immensely. There is a catch though; as power increases, greed and corruption increases with it and the temptation to go too far is obvious for all to see.

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Off Target

June 30, 2016

Money, generally accepted medium of exchange, acts as a veil that confuse and blurs economic relations. This is especially true when it comes to intertemporal considerations. Whilst probably the most important institution in a free market, money can be highly destructive when politicized. Why? Because politics is about power and distribution of real wealth. And since money affect almost every single transaction, politics can span throughout society with ease when in control of money. Amchel Rothschild was spot on when he allegedly said “[g]ive me control of a nation’s money supply, and I care not who makes its laws.” Power over money is power over people and power over people is, well, pure power. Money is thus the most sacred tool in a statist’s toolbox and has become instrumental in their quest to control society and allocate resources as they see fit.
It is within this context the monstrosity called the euro need to be analyzed. By pooling Western European countries within the realm of one central bank, power over people increases immensely. There is a catch though; as power increases, greed and corruption increases with it and the temptation to go too far is obvious for all to see.

Read More »

South China Sea: Storm in an Indian Ocean Teacup

June 27, 2016

With global attention focused on BREXIT calamity, potentially more important questions are being overlooked, and especially in the South China Sea where storms are currently brewing between China and a range of littoral states for strategic control of territorial waters. To be clear, our long term geostrategic position remains unchanged; China will gradually secure control of the South China and East China Seas through its so called ‘nine dash’ line, with the eventual battle for geo-maritime ascendency playing out in the Indian Ocean into the 2030s between China on the one hand, and America on the other. That much remains inexorable, but it’s what happens along the way to that eventual outcome where all the residual risks remains.
The most proximate trigger currently relates to pending legal rulings in The Hague that’s almost certain to rule in favour of Philippines legal claims towards the Spratly Islands. We’ll leave all the legal complexities aside, where this is essentially adjudicating on the technical basis of UNCLOS claims rather sovereignty per se. But suffice to say, China will not only reject the findings, it will up the ante with sabre rattling and maritime movements around the Spratly’s with further land reclamation around Scarborough Shoal.

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The West Africa Question

June 25, 2016

The political stakes are rising fast for West African production, and especially in the two major states, Angola and Nigeria. One story is essentially succession based around President dos Santos in Luanda, where he’s making sure his own daughter, Isabel dos Santos cover his political / corruption tracks in Angola.  The other, is whether President Buhari can pull back from the brink of political collapse in the Niger Delta without resorting to full blown military force. On both counts, we have few doubts that ‘iron political fists’ will notionally help to consolidate power, but it’s going to come with debilitating implications for long term production. ‘Tighter politics, shakier oil’.
The problems are very different in both capitals, even though the ‘Atlantic Basin’ outcome of stranded West African political assets will be the same. But let’s do each in turn. For Angola, this is all about the eventual Santos succession beyond the 37 year term of Jose Eduardo do Santos. The first big date in the diary is 17-20th August 2016 where the Party Congress will rubber stamp another Santos term, even though the President claims he’ll stand aside in 2018 rather than seeing through a full five year play to 2021.

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China’s Lender of Last Resort Conundrum

June 21, 2016

It took a while to play through, but our assessment that China would increasingly become the petro-state lender of last resort is starting to come good. The primary reason for that is producer states are rapidly running out of time to present full scale political implosion on the back of chronic economic pressures. For all the hype around current ‘price recovery’, it means absolutely nothing for most producer states. It’s becoming painfully obvious that the prevailing geopolitical price of survival is structurally out of sync with geological costs of production. Ten dollars here, ten dollar there; it doesn’t really matter: Either China ‘steps up or steps out’ as the lender of last resort to keep fragile petro-states in the black at this stage. You’d think that’s a relatively easy call to make, but it’s anything but for Beijing. Prop up one petro-state, and the same standard will be applied across the board. Let one fail, and political contagion risks become very real across China’s entire supply base. That defines the very core of the lender of last resort conundrum for China. Where does Beijing want to draw its petro-state lines?
The most obvious (and extreme) test case is of course Venezuela.

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The Dumbest Monetary Experimental End Game In History

June 18, 2016

We have seen several explanations for the financial crisis and its lingering effects depressing our global economy in its aftermath. Some are plain stupid, such as greed for some reason suddenly overwhelmed people working within finance, as if people in finance were not greedy before 2007. Others try to explain it through “liberalisation” which is almost just as nonsensical as government regulators never liberalised anything, but rather allowed fraud, in polite company called fractional reserve banking, to grow unrestrained. Some point to excess savings in exporting countries as the culprit behind our misery. Excess saving forces less frugal countries reluctantly to run deficits, or so the argument goes.
While some theories are pure folly, others are partial right, but none seem to grasp the fundamental factor that pulled and keep pulling the world into such unsustainable constellations witnessed in global finance, trade and capital allocation.
[embedded content]
Whenever we try to explain the reasons behind the crisis, such as the build-up in non-productive and counterproductive debt (see here, here and here for more details) people ask us why did this happened now, and not earlier? It is a fair question that we have thought about and believe have one simple answer. Bottom line, the world economy is running on a system with no natural correcting mechanisms.

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You are currently living through the dumbest monetary experimental end game in history (including Havenstein and Gono’s)

June 18, 2016

We have seen several explanations for the financial crisis and its lingering effects depressing our global economy in its aftermath. Some are plain stupid, such as greed for some reason suddenly overwhelmed people working within finance, as if people in finance were not greedy before 2007. Others try to explain it through “liberalisation” which is almost just as nonsensical as government regulators never liberalised anything, but rather allowed fraud, in polite company called fractional reserve banking, to grow unrestrained. Some point to excess savings in exporting countries as the culprit behind our misery. Excess saving forces less frugal countries reluctantly to run deficits, or so the argument goes.
While some theories are pure folly, others are partial right, but none seem to grasp the fundamental factor that pulled and keep pulling the world into such unsustainable constellations witnessed in global finance, trade and capital allocation.
Whenever we try to explain the reasons behind the crisis, such as the build-up in non-productive and counterproductive debt (see here, here and here for more details) people ask us why did this happened now, and not earlier? It is a fair question that we have thought about and believe have one simple answer.

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Tough Choices: Peg or Banking Crisis?

June 4, 2016

During the reign of the mighty petro-dollar standard, it was necessary for major oil exporters to recycle their dollar holdings back into the dollar-based financial system to maintain their self-imposed exchange rate pegs. US government bonds are the very centrepiece of this elaborate system and it is thus no surprise to see the dollar price correlate well with overall OPEC TSY holdings. In other words, when oil prices were high, oil exporters amassed a capital surplus that were channelled into, among other things, US treasury bonds. When oil prices fell, oil exporters had to liquidate TSY holdings to cover capital shortfalls.  
It is interesting to note that the more money and credit issued in the US the more foreign goods could be purchased by Americans and by extension the more foreign demand for US TSYs rose. The savings glut proposed by Bernanke was, and still is, nothing more than exported dollar inflation. There were no savings glut, but rather an indirect form of QE long before QE became an official policy. Home equity withdrawal lines through commercial banks, based on phony asset appreciation promoted by an accommodative Federal Reserve policy stance, increased Americans purchasing power, which inevitably leaked into global markets. Growing financial imbalances were exacerbated by the fact that there were no functioning pricing mechanisms to correct these flows.

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