How I learnt to stop wor­ry­ing and love The Bank

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Hav­ing just read the World Eco­nomic Forum’s Report on sus­tain­able credit, I now realise that I was wrong to worry about the growth in debt. After all, since 1932, the US’s debt to GDP ratio has actu­ally fallen at a rate of 0.2% per year!

How could I ever have thought that the growth of credit could have caused the Great Reces­sion, when in fact the growth rate of debt has been neg­a­tive?

I am also chas­tened to realise that credit is only used for good pur­poses. As the report notes:

In the long run, the scale and dis­tri­b­u­tion of credit is only eco­nom­i­cally sus­tain­able if it also meets society’s broader social objec­tives. Credit is linked to social objec­tives dur­ing all stages of a country’s eco­nomic devel­op­ment. In early stages of devel­op­ment, credit is used to sup­port fam­ily-owned busi­nesses; next, it sup­ports small and large cor­po­ra­tions; and finally it is used to smooth con­sump­tion. Muham­mad Yunus, founder of Grameen Bank, goes so far as to say that credit is a human right, and adds: “If we are look­ing for one sin­gle action which will enable the poor to over­come their poverty, I would focus on credit.” (p. 39)

Fool­ish me: here was I, think­ing that credit might also be used to fund Ponzi Schemes.

OK, enough with the irony. The WEF’s report is not all bad—there are some very good bits that I’ll get on to later—but it com­mits at least three fun­da­men­tal errors: it uses a ques­tion­able base year for its analy­sis, it omits a cru­cial vari­able, and it main­tains a wholly benign view of a fac­tor that expe­ri­ence indi­cates has both benign and malig­nant attrib­utes.

A Questionable Base Year: why 2000?

The ques­tion­able base year is 2000. The WEF team, work­ing with McK­in­sey & Com­pany, have put together an impres­sive data­base on debt lev­els in 79 coun­tries, with debt dis­ag­gre­gated into 3 sec­tors:

  • Retail credit: All house­hold credit stock (loans out­stand­ing), includ­ing mort­gages and other per­sonal loans such as credit cards, auto loans and other unse­cured loans
  • Whole­sale credit: All cor­po­rate and SME credit stock (loans and bonds out­stand­ing)
  • Gov­ern­ment credit: All pub­lic sec­tor credit stock (includ­ing loans and bonds out­stand­ing) (p. 19)

But to start in 2000? That was just before the last big credit bust, when the Dot­Com fiasco came crash­ing down. Why not—at least for the coun­tries where debt data is read­ily available—go back a bit fur­ther? Debt data for the USA is read­ily avail­able to 1952 from the Flow of Funds, and his­tor­i­cal data for ear­lier years can be derived from the US cen­sus. Australia’s Reserve Bank pub­lishes reli­able aggre­gate credit data till 1976, and ear­lier data is avail­able to take it back to 1953. As a sole indi­vid­ual, I’ve been able to acquire data till 1920 for the USA and 1860 for Aus­tralia. Surely the WEF and McK­in­sey and Co, with the resources they had to throw at this project, could have done bet­ter than 2000.

Why omit financial sector debt?

The report omits bor­row­ing by within the finan­cial sec­tor from its record of total debt, when this has been a major com­po­nent of the growth of debt (cer­tainly in the USA) in the last 60 years. I include finan­cial sec­tor debt in my analy­sis for two rea­sons:

  • The ini­tial bor­row­ing by the shadow bank­ing sec­tor from the banks cre­ates both money and debt;
  • The money onlent by the shadow bank­ing sec­tor to other sec­tors of the econ­omy cre­ates debt to the shadow bank­ing sec­tor, but not money

I fre­quently get the argu­ment that debt within the finan­cial sec­tor can be net­ted out to zero, but I think this ignores those two fac­tors above: the cre­ation of addi­tional debt-backed money by the ini­tial loan, and the cre­ation of fur­ther debt to the finan­cial sector—most of which has been used to fund asset bub­bles rather than pro­duc­tive invest­ment.

Just for com­par­i­son, here’s that same 1932 to 2010 com­par­i­son, but with the finan­cial sector’s debt included:

Even with the same non­sense base year, and even with com­bin­ing pri­vate and pub­lic debt—factors that I believe should be kept separate—this paints a some­what dif­fer­ent pic­ture.

And a focus on total pri­vate sec­tor debt dur­ing and after the Great Depres­sion also con­veys a some­what dif­fer­ent per­spec­tive.

Which raises the third issue…

Why ignore Ponzi Schemes—and Minsky?

The report’s list­ing of the uses to which credit is put is so inno­cent as to make me won­der whether one of the author’s pri­mary school chil­dren wrote the rel­e­vant para­graph:

In early stages of devel­op­ment, credit is used to sup­port fam­ily-owned busi­nesses; next, it sup­ports small and large cor­po­ra­tions; and finally it is used to smooth con­sump­tion.

But maybe I’m being harsh: it could, after all, have been writ­ten by a neo­clas­si­cal econ­o­mist.

Please, let’s get real: yes credit can do all of those things, but it can also fund asset bub­bles and Ponzi Schemes, and that has been by far the dom­i­nant aspect of credit growth since the report’s base year of 2000, and arguably since the 1987 Stock Mar­ket Crash. To ignore this aspect of credit after the biggest finan­cial cri­sis since the Great Depres­sion is sim­ply puerile.

So is ignor­ing the one aca­d­e­mic who analysed the dynam­ics of credit long before it was fashionable—Hyman Min­sky. The report makes much of it aca­d­e­mic research:

Finally, the research was under­pinned by an exten­sive review of the key aca­d­e­mic and indus­try lit­er­a­ture. (p. 19)

Prior to 2008, such igno­rance was excus­able sim­ply because it was so wide­spread, as the dom­i­nant neo­clas­si­cal school sim­ply ignored dis­si­dents like Minksy. After the cri­sis, he is receiv­ing long over­due respect for focus­ing on the impor­tance of credit in a cap­i­tal­ist econ­omy while neo­clas­si­cal econ­o­mists effec­tively ignored it.

This is why Min­sky-ori­ented researchers like myself, Michael Hud­son and the late Wynne God­ley were able to see the Great Reces­sion com­ing while neo­clas­si­cal econ­o­mists from Ben Bernanke down were deny­ing that any­thing unto­ward was unto­ward. Pub­lish­ing a major report on credit now, while ignor­ing the only sig­nif­i­cant research done into credit dynam­ics, is a sign of con­tin­ued igno­rance rather than wis­dom.

Its over­all conclusion—the only part of the report that is likely to get an air­ing in the gen­eral media—should there­fore be taken with a truck­load of salt:

The rapid expan­sion of credit in recent decades has enabled unprece­dented lev­els of eco­nomic devel­op­ment, busi­ness activ­ity, home own­er­ship and pub­lic sec­tor spend­ing. Yet, excess lend­ing in some mar­kets and sec­tors sparked a global cri­sis which brought the entire finan­cial sys­tem to its knees. Not sur­pris­ingly, many com­men­ta­tors believe credit should be scaled back, even at the expense of eco­nomic growth.

The analy­sis in this report sug­gests the oppo­site is true. There are major pock­ets of the world econ­omy, par­tic­u­larly in devel­op­ing mar­kets, whose growth has been held back by credit short­ages, even over the past 10 years. To unlock devel­op­ment in these areas, and to meet con­sen­sus fore­casts of world eco­nomic growth, credit lev­els must grow sub­stan­tially over the next decade. At the same time, pub­lic and pri­vate deci­sion-mak­ers must avoid a repeat of the credit excesses that have caused so much dam­age in recent years. (p. 19)

Like a Curate’s Egg

How­ever, despite its defi­cien­cies, the report is not all bad—but its good bits are too con­ser­v­a­tive. It pro­poses a num­ber of “rules of thumb” to indi­cate whether credit lev­els and credit growth are sus­tain­able or not:

These are related to the mea­sures that I have been putting for­ward on this site for years—the debt to GDP ratio, the rate of change of debt, and recently the “Credit Impulse” as defined by Biggs, Mayer and Pick (see also this paper), the rate of change of the rate of change of debt, divided by GDP. I’ll come back to these later as alter­nate indi­ca­tors, but it’s worth not­ing the guid­ance these rules of thumb gave for where credit crises might occur in the near future. Their Exhibit 15 showed a “local sus­tain­abil­ity” index for their sam­ple of coun­tries in 2006, with the sam­ple sorted by the aggre­gate level of debt (hence Japan is at the top). The guide is laid out accord­ing to this leg­end:

And the coun­tries iden­ti­fied using 2006 data as poten­tial trou­ble spots were those with one or more red cells next to their names:

The same analy­sis on 2010 data yields the fol­low­ing table of sus­pects:

The rules of thumb them­selves are pretty good. The weak­nesses with their analy­sis are (a) that they allow the thumbs to be much too large, and (b) that they under­play the role of the bank­ing sec­tor in caus­ing these prob­lems in the first place.

As reg­u­lar read­ers would know, I site respon­si­bil­ity for this cri­sis on the lenders them­selves, and not the bor­row­ers, on a num­ber of grounds (see my Rov­ing Cav­a­liers of Credit post if you haven’t seen these argu­ments before, and this paper for a more tech­ni­cal argu­ment). The finan­cial sec­tor makes money by cre­at­ing debt, and has funded a series of spec­u­la­tive bub­bles since the early 1980s since that is the best way to encour­age bor­row­ers to take on more debt.

Min­sky him­self argued that the major objec­tive of eco­nomic man­age­ment should be to main­tain a “robust finan­cial struc­ture”:

, in order to do bet­ter than hith­erto, we have to estab­lish and enforce a “good finan­cial soci­ety” in which the ten­dency by busi­ness and bankers to engage in spec­u­la­tive finance is con­strained.

The finan­cial insta­bil­ity hypoth­e­sis has pol­icy impli­ca­tions that go beyond the sim­ple rules for mon­e­tary and fis­cal pol­icy that are derived from the neo-clas­si­cal syn­the­sis. In par­tic­u­lar the hypoth­e­sis leads to the con­clu­sion that the main­te­nance of a robust finan­cial struc­ture is a pre­con­di­tion for effec­tive anti-infla­tion and full employ­ment poli­cies with­out a need to haz­ard deep depres­sions. This implies that poli­cies to con­trol and guide the evo­lu­tion of finance are nec­es­sary… (Min­sky 1982, pp. 69, 112)

He asserted that the US passed from such a struc­ture to a frag­ile one with the Penn State cri­sis in 1966.

The first twenty years after World War II were char­ac­ter­ized by finan­cial tran­quil­ity. No seri­ous threat of a finan­cial cri­sis or a debt-defla­tion process (such as Irv­ing Fisher described15) took place. The decade since 1966 has been char­ac­ter­ized by finan­cial tur­moil. Three threats of finan­cial cri­sis occurred, dur­ing which Fed­eral Rserve inter­ven­tions in money and finan­cial mar­kets were needed to abort the poten­tial crises.

The first post-World War II threat of a finan­cial cri­sis that required Fed­eral Reserve spe­cial inter­ven­tion was the so-called “credit crunch” of 1966. This episode cen­tered around a “run” on bank-nego­tiable cer­tifi­cates of deposit. The sec­ond occurred in 1970, and the imme­di­ate focus of the dif­fi­cul­ties was a “run” on the com­mer­cial paper mar­ket fol­low­ing the fail­ure of the Penn-Cen­tral Rail­road. The third threat of a cri­sis in the decade occurred in 1974–75 and involved a large num­ber of over-extended finan­cial posi­tions, but per­haps can be best iden­ti­fied as cen­ter­ing around the spec­u­la­tive activ­i­ties of the giant banks. In this third episode the Franklin National Bank of New York, with assets of $5 bil­lion as of Decem­ber 1973, failed after a “run” on its over­seas branch.

Since this recent finan­cial insta­bil­ity is a recur­rence of phe­nom­ena that reg­u­larly char­ac­ter­ized our econ­omy before World War II, it is rea­son­able to view finan­cial crises as sys­temic, rather than acci­den­tal, events. From this per­spec­tive, the anom­aly is the twenty years after World War II dur­ing which finan­cial crises were absent, which can be explained by the extremely robust finan­cial struc­ture that resulted from a Great War fol­low­ing hard upon a deep depres­sion. Since the mid­dle six­ties the his­toric cri­sis-prone behav­ior of an econ­omy with cap­i­tal­ist finan­cial insti­tu­tions has reasserted itself. The past decade dif­fers from the era before World War II in that embry­onic finan­cial crises have been aborted by a com­bi­na­tion of sup­port oper­a­tions by the Fed­eral Reserve and the income, employ­ment, and finan­cial effects that flow from an immensely larger gov­ern­ment sec­tor. This suc­cess has had a side effect, how­ever; accel­er­at­ing infla­tion has fol­lowed each suc­cess in abort­ing a finan­cial cri­sis. (Min­sky 1982, pp. 62–63)

On that basis, the cor­rect time period from which to derive rules as to how big the “sore thumbs” of finance should be is the 1960s, and not 2000. That implies alter­na­tive fig­ures for the WEF’s indi­ca­tors that would have most of its indi­ca­tor table in red—certainly the first col­umn for house­hold sec­tor debt.

My three indi­ca­tors are the deb t to GDP ratio (which tells you how many years it would take to repay debt and is a mea­sure of the degree of pres­sure debt is exert­ing on the econ­omy), the rate of change of debt as a per­cent­age of GDP plus the change in debt (which tells you how much of aggre­gate demand is debt-financed, and there­fore whether you are in dan­ger ter­ri­tory for a finan­cial cri­sis), and the credit impulse—the rate of change of the rate of change of debt as a frac­tion of GDP, which tells you whether a cri­sis is immi­nent and how deep it is when it strikes.

My thumb size rules, based on these indi­ca­tors and for the USA only, are the fol­low­ing:

The US was finan­cially robust when the total pri­vate sec­tor debt to GDP ratio was below 100%; it was approach­ing poten­tial Depres­sion-level fragility when this ratio exceeded 175% of GDP.

When debt-financed demand accounts for more than 10 per­cent of aggre­gate demand, trou­ble is afoot (again for the USA—other coun­tries may have dif­fer­ent thresh­olds):

Finally, and some­what ten­ta­tively, I’d see dan­ger com­ing when the Credit Impulse exceeds 3% in either direc­tion: 3% plus indi­cates a bub­ble, and 3% minus indi­cates that you are in a bust. On that met­ric, this is the biggest bust of all (the 1945 fig­ure was an aber­ra­tion as we moved from a war econ­omy to a peace­time one).

On all three indi­ca­tors, the USA has been in a finan­cially frag­ile state since the early 1970s—a con­clu­sion that accords with Minsky’s deci­sion to date the tran­si­tion to a frag­ile finan­cial struc­ture in 1966—rather than the year 2000. The WEF’s report, while it does per­form a use­ful ser­vice in finally rec­om­mend­ing that credit and credit growth be taken seri­ously in eco­nomic man­age­ment, will ulti­mately be seen as an indi­ca­tor of just how seri­ously econ­o­mists under­es­ti­mated the role of credit in caus­ing eco­nomic crises, even when they were in one.

Min­sky, H. P. (1982). Can “it” hap­pen again? : essays on insta­bil­ity and finance. Armonk, N.Y., M.E. Sharpe.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Re: the amend­ment thing

    Could you at least offer an opin­ion about the jubilee, and specif­i­cally the debts I exempted from being can­celed: FRN’s and demand deposits?

    I under­stand you’re not a fan of the gold stan­dard. I’m re-think­ing some aspects of that any­way. But I really would like some feed­back on the idea that IF we have a jubilee, those two things would have to be an excep­tion to the debt relief.

    Sorry if that’s a pain in the neck. Thanks any­way even if you can’t get to it.

  • sir­ius

    The sys­tem has now been repaired so that it will deliver the true jus­tice demanded of it (I am being sarcastic).…but truth to say who really can rule over such a sys­tem when “the rules” are changed so fre­quently?


    “Could the Fed go broke? The answer to this ques­tion was ‘Yes,’ but is now ‘No,’” said Ray­mond Stone, man­ag­ing direc­tor at Stone & McCarthy in Prince­ton, New Jer­sey. “An account­ing method­ol­ogy change at the cen­tral bank will allow the Fed to incur losses, even sub­stan­tial losses, with­out erod­ing its cap­i­tal.”

    This enhances trans­parency by pro­vid­ing clearer, more fre­quent, snap­shots of the cen­tral bank’s finances, ana­lysts say. The bonus: the num­ber can now turn neg­a­tive with­out affect­ing the cen­tral bank’s under­ly­ing finan­cial con­di­tion.
    ”””

    http://www.cnbc.com/id/41198789

    This appears typ­i­cal of the U.S. sys­tem each com­po­nent is setup so that it “can­not fail” — one other exam­ple — the pri­mary deal­ers for Trea­sury Bonds are forced to buy any bonds that would not be sold ensur­ing that all sales “suc­ceed”.

  • Ramanan

    Thanks nice.

    Yes of course, not com­pa­ra­ble to other nations which are vul­ner­a­ble.

  • I think you are miss­ing the risk that over­seas fund­ing rep­re­sents. The level doesn’t mat­ter as much as the replace­ment like­li­hood — if there is lots of liq­uid­ity slosh­ing around in Aus­tralia, then it doesn’t mat­ter if over­seas fund­ing dries up. If there is not, it is a prob­lem.

    Look at it this way — the RBOC raises rates sharply to head off food infla­tion. China imports tank. The ‘mar­kets’ reckon this will have a deep neg­a­tive effect on Aus­tralia. Spec­u­la­tive-boosted com­mod­ity prices tank. 

    Rumours abound about a sin­gle over-lever­aged prop­erty-devel­oper-lend­ing bank that is reliant to a large degree on both over­seas fund­ing and short-term inter­bank lend­ing (it is both bor­row­ing short and from ‘over there’). Rumours spread to the other banks that the first bank has an active derivates desk that has insured much of their cov­ered bond issuance. Prop­ery prices are div­ing, unem­ploy­ment is ris­ing and mort­gage defaults (despite recourse and dra­con­ian bank­ruptcy laws) are ris­ing — they are not result­ing in repos­ses­sions, but no pay­ments are being made on the mort­gages. In par­tic­u­lar, devel­op­ers and com­mer­cial prop­erty own­ers are effec­tively going bank­rupt, with only bank for­bear­ance stop­ping this being a mass extinc­tion event.

    In the midst of this, bank A, a large bank, sud­denly finds it can no longer bor­row unse­cured. Its secured repo has reduced from six months to three months to one month to one week and is threat­en­ing to go over-night. It has a large yen bond redemp­tion com­ing soon that it has to roll over. The redemp­tion is large for the bank, but small in the over­all scheme of things. The gov­ern­ment, pan­iced by the impli­ca­tions of a large bank fail­ing, queues form­ing, ATMs empty, guar­an­tees every­thing. Two years later, the coun­try calls in the IMF

    What hap­pens? The whole sys­tem is illiq­uid, for­eign lenders are run­ning scared. Once the trust in a sys­tem breaks down, the sys­tem tends goes with it. PS the pre­vi­ous two para­graph are one read on what hap­pened in Ire­land (in case you hadn’t guessed)… (there are many other fac­tors to include (!)).

  • PS really enjoy­ing your respond­ing to com­ments Mr. Keen! Thank you so much.

  • Oh, I’m not miss­ing the point Yogan, I just didn’t make it in my reply to you. Your analy­sis of what could hap­pen is spot on.

    My start­ing point on this is the “loans cre­ate deposits” per­spec­tive, com­bined with a coun­try run­ning a chronic cur­rent account deficit. This means that (say) only 85% of the money cre­ated as loans comes back as deposits to the national bank­ing sys­tem. They there­fore have to raise the remain­ing 15% over­seas. If there is a Ponzi scheme behind the lend­ing they are doing, rather than lend­ing to finance pro­duc­tive invest­ment in the future that will in turn elim­i­nate that cur­rent account deficit, then dis­as­ter lies ahead.

    The Aus­tralian sys­tem was com­pli­cated by the fact that a lot of the lend­ing to finance prop­erty spec­u­la­tion came from non-bank lenders that bor­rowed off­shore to lend locally–in which case there was a dif­fer­ent mech­a­nism afoot with the for­eign bor­row­ing fund­ing profligate/Ponzi behav­ior here. Then the non-banks failed and got taken over by the banks dur­ing the GFC, and now the banks have to roll over that hypo­thet­i­cal 15% gap between loans and deposits as out­lined above. Should a crack occur in the Ponzi scheme–the hous­ing bubble–then the credit crunch sce­nario you out­line is highly likely–if not down­right inevitable.

  • An exam­ple of applied “eco­nomic the­ory”: it’s called ‘eco­nomic entan­gle­ment’

    http://blog.littlesis.org/2011/01/10/evidence-of-an-american-plutocracy-the-larry-summers-story/

  • mahaish

    hi yogan­ma­hew,

    In the midst of this, bank A, a large bank, sud­denly finds it can no longer bor­row unse­cured. Its secured repo has reduced from six months to three months to one month to one week and is threat­en­ing to go over-night”

    yes a waller­s­tin­ian dilema, cap­i­tal flows to the periph­ery dry up, just like in the 30’s,
    but they had the gold stan­dard. things are dif­fer­ent, we have a sov­er­eign cur­rency, and a freely float­ing on at that, sort of. 

    the gov­ern­ment can pro­vide the fund­ing vehi­cle, or more specif­i­cally the cen­tral bank can pro­vide the liq­uid­ity, and make a mar­ket, in its own cur­rency.

    pre­ci­cely what the fed did in the dark days after lehmans,

    What hap­pens? The whole sys­tem is illiq­uid, for­eign lenders are run­ning scared. Once the trust in a sys­tem breaks down, the sys­tem tends goes with it. PS the pre­vi­ous two para­graph are one read on what hap­pened in Ire­land (in case you hadn’t guessed)… (there are many other fac­tors to include (!)).”

    again the gov­ern­ment and the cen­tral bank can pro­vide the liq­uid­ity. we can have debate about the pric­ing of that liq­uid­ity, even though thats at the descre­tion of the gov­ern­ment as well, me thinks

    ire­lands a bad exam­ple, cant really com­pare it with the sitch in oz

    ire­land has signed up to the mod­ern day equiv­i­lent of the gold stan­dard, emu(european mon­e­tary union) and the mas­tre­icht treaty(almost as bad as the treaty of ver­saille).

    so not only do they have a com­mon cur­rency , the euro, they have signed up to arti­fi­cial bud­getary con­straints as well. stay tuned for the rev­o­lu­tions

    we have a float­ing sov­er­eign cur­rency, they dont. its a big dif­fer­ence.

    and the imf, no chance, we are not ire­land or ice­land, or any other coun­try in that god for­saken sodom call the euro­pean union.

    cheers

  • mahaish

    This appears typ­i­cal of the U.S. sys­tem each com­po­nent is setup so that it “can­not fail” – one other exam­ple – the pri­mary deal­ers for Trea­sury Bonds are forced to buy any bonds that would not be sold ensur­ing that all sales “suc­ceed”.”

    the prob­lem is sir­ius,

    that the US trea­sury can­not run an over draft at the fed, so they have to issue trea­suries to cover their appro­pri­a­tions.

    con­gress need to change the rules get rid of the debt ceil­ing and over draft rules, and hence take the bond traders out of the game, instead of rely­ing on the fed to manip­u­late the mar­ket, and indi­rectly bring­ing the bond traders to heal, through their assett pur­chase pro­grams

  • Will do Atti­cus: as you know, I agree with you on the need for a Jubilee.

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  • djc

    When debt-financed demand accounts for more than 10 per­cent of aggre­gate demand, trou­ble is afoot (again for the USA—other coun­tries may have dif­fer­ent thresh­olds):”

    It seems to me that there is likely to be gen­eral agree­ment that debt is good up to a point but no gen­eral agree­ment what that point is. One objec­tive mea­sure is that the lat­est round of loans are to bor­row­ers with no chance of repay­ing. But apart from spe­cial cases like sub­prime surely that would be at much higher lev­els than 10–20% GDP.

    So pre­sum­ably the peak val­ues are deter­mined by behav­ioural fac­tors, a “con­cern there is too much debt”. If that’s the case the limit is strongly time-depen­dent, from about 8% around 1960 to 20% most recently. And why does the curve drop sharply after most peaks, rather than stay roughly con­stant? Bankers are no more ratio­nal than most peo­ple? What is it about “this time” that has caused the curve to fall way below the most recent min­i­mum, unlike for most ear­lier peri­ods when each min­i­mum was roughly the same as pre­vi­ous ones?

    Is the entire curve a series of Min­sky Moments (at each peak), each at a higher debt level, until the most recent which has totally scared the beje­sus out of evey­one?

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  • You mis­read me djc: I didn’t say that the debt to GDP ratio should top out at 10%, but that when the debt-financed pro­por­tion of aggre­gate demand exceeds 10%, trou­ble is ahead. That could hap­pen at a debt ratio of 1% to 300%, depend­ing on the rate of growth of debt. But yes, the entire curve is a series of Min­sky moments hap­pen­ing at higher and higher debt to GDP ratios.

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