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====== 3 Definition of the Main Problem ====== A large economy such as Germany, is an extremely complex entity, in which a wide array of subjects is hardly predictable in detailed influences. Not everything is predictable, some appear as God-given destiny and is beyond our imagination. Nevertheless, the two key variables of an economy behave surprisingly unperturbed by this, partly as intensely felt movements: the gross domestic product Y and the total capital stock K. We first like to have a look to the following Figure 1, the example illustrates the real figures of the FRG. The evolution proceeds relatively steadily, with the first strong step can be seen in 1990. This results from the integration of the GDR6 and its population in the FRG. The considerable increase in population produces the offset in capital stock and GDP at the same time. The next unusual drop can be seen around the year 2000: The strong growth of capital from that time on could no longer be maintained. It was the era of so-called dotcom crash, when the speculation in the then still quite fresh Internet technologies proved to be exaggerated. The GDP remained unmoved by the DotCom-bubble and continued to increase only linearly. The next break-in, the Lehman crisis is noticeable from 2008 both in a negative bend of the asset development and the development in the GDP as well. What is immediately noticeable is the enormous increase in the spread between the development of the totality of all capital stocks and the gross domestic product. The ratio K/Y was in 1950 about 0.38, yet it rose to 3.25 in 2008. That this can cause problems is obvious, although the classical growth theories of macroeconomics can not see any problems here. The classical growth models, to which we will relate in detail later, are based in the majority on the so-called Cobb-Douglas production function (CDPF). It states in the standard form the following relationship: (3.1) Here Y is GDP, K the capital stock, or more specifically the use of capital, which is a subset of the total capital stock. The prefactor c is generally a factor that can be temporally variable. The exponents a and b add up to 1 in most implementations, soand thus. Next L is labor input. In many practical cases, one assumes , by what we get in the simplest case (3.2). What we see now is that the GDP would undoubtedly increase through expanding the use of labor, as well as from the additional capital investment. Because of the root in the function, and thus the effectiveness of labor or capital input as well, also remains positive in each case, although a little bit less than in the linear case. More than that we may even say that in the case of a highly developed national economy, and therefore already has a high L and K, just a particularly strong boost of capital would be needed to effectively stimulate the economy. Unfortunately indicates the heightened financial and economic crisis since 2008, that this is not the case. For as we can see in Figure 1 of the real numbers, despite the enormous growth of capital since 1990, no appropriate economic recovery7 has taken place. On the contrary, growth has actually slowed steadily, and got eventually even negative. Even the enormous financial support in wake of the Lehman crisis could change this situation not sustainable. Fig. 2: Total capital ratio (top) and percentage of direct capital investment to GDP (center) in relation to GDP in the Federal Republic of Germany from years 1950 to 2010 according to figures from the Bundesbank. The lower curve describes the relationship between the top two to each other )relation of loans to GDP relative to total business of the financial institutions). From about 2000, this ratio falls below 0.5 = 50%. For the official tables OU0308 and OU0115 see Appendix. Essential for the macro economy is the consideration of the capital coefficient. But the notion of capital input will be crucial for balancing economies. The capital coefficient now is defined in classical macro-economics as the ratio of capital expenditure to gross domestic product. For in classical macro-economics, it is assumed that the economic momentum arises only from the capital, which is granted directly8 by lending to the real economy and develops thus solely macro-economic dynamics. For this we have a look at Figure 2, in which we have entered next to the total capital stock the share of direct capital investment by lending to non-banks according to official data from years 1950 to 2010. The graph clearly shows that it is increasingly difficult for the GDP to process the existing amount of capital. About in 1967 the total capital stock already exceeded the entire9 GDP, from the mid-1980s even the direct use of capital stock by loans exceeded 100% of the GDP. In the dotcom hype the absorbed amount of loans reached a maximum value of nearly 1.5-times the GDP, which is quite amazing. Since then, despite considerable expansion of money supply, it decreases continuously again to about 130%. The effect has been discussed many times and even without mathematics the logic lies close to it, as the absorbing ability of the GDP for loans is not infinite. An absorbation of all assets in the form of direct loans to GDP at a total capital ratio of more than 3, would mean that the GDP would be implemented at least every four months fully again. A greater emphasis on capital will therefore preferred to use this as an investment instrument traded between banks in the so-called banks own business or investment banking. For the needs of the GDP are already more than covered, and the lack of demand results in low capital prices. This means that the attainable yields in the commercial bank model are rather lower than they are remaining in the investment sector. Significantly for our purposes is simply that the classical growth models still predict a further increase in growth by more capital, although this is not the case10, apart from short-term effects. Important in this context is the concept of capital efficiency, also called capital productivity or marginal productivity of debt. This indicates how much new GDP is generated by each monetary unit of new capital. How is the coefficient (3.3) ? So we have a look at the real numbers in Figure 3. As we see, this coefficient decreases continuously. Were at the beginning of the FRG have generated an average for every euro of fresh capital and at least one euro of GDP, so that productivity decreased in 2010 to virtually zero, and falls further in the medium term. An effect that we see clearly in the USA too. Fresh capital is thus de facto in the unproductive time, even counterproductive. How can that be? One can also study the inverse of the capital productivity, ergo the GDP with respect to productivity of capital: (3.4) This indicates how much additional capital per € GDP growth needs to occur. Because of this coefficient is, however, possibly singular, and is therefore not so easy to grip. But you can see that this coefficient is now running against uncomfortably large numbers. For each additional € of GDP are seemingly "produced” if not hundreds, finally thousands of euros of capital. Fig. 3: Capital productivity in the FRG from 1950 to 2010, according to official figures from Bundesbank. This strange-sounding effects of the variables Y and K are international progressed similarly in a phenomenological way, particularly in the already well-developed western democracies. Another part of the problem are the curves over the period of public debt and inflation. Even this, internationally empirically anywhere to observe phenomena, run off to the same-shaped verifiable laws. The often represented populist assumption that these hostages of community would be based on incompetent politicians, is certainly used far too short. Because these phenomena are consistent over all in the world and can also be observed regardless of the political or economic orientation of nations. A working macroeconomic theory should explain all these empirically observable basic economic phenomena out of simple fundamentals. Nothing more, but nothing less, we must demand. As a first step, we first clarify definitional our most important terms: The total capital coefficient is the ratio (3.5) of the sum of all national bank assets K to gross domestic product Y. (The current values of K are the U0308 series data of the Federal Bank). The classical capital coefficient is the ratio of the immediate use of capital in the form of loans in the real economy. This money can be seen in detail at the Federal Bank data series U0115 and we refer to this aggregate as . So the classical capital coefficient is defined as: (3.6) Some authors also known to use monetary aggregates , which give only an approximate indication of the cash money and are hardly suitable for exact calculations. We define the immediate capital investment in the real economy, as the share of total capital stock, which is introduced in a direct manner to the GDP, which we defined above with the abbreviation (3.7). The indirect use of capital is thus the difference from the total sum of all bank assets K (U0308 series) and (U0115 series), so defined as (3.8). Indirect capital investment means that it is used as investment vehicles in the interbank market (or better: must be used). The indirect capital coefficient is thus defined as (3.9). ---- Back to [[econenggenreith#Contents|Book-Contents-Page]]