Calm before the Storm: Instability series (4)

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In 1992, I built a mod­el of Minsky’s ‘Finan­cial Insta­bil­i­ty Hypoth­e­sis’ that sim­u­lat­ed the debt-induced break­down he argued could hap­pen in a cap­i­tal­ist econ­o­my. But it also had an unex­pect­ed fea­ture: the break­down was pre­ced­ed by a peri­od of appar­ent sta­bil­i­ty. Ini­tial volatil­i­ty gave way to a peri­od of tran­quil­li­ty, which was then fol­lowed by increas­ing volatil­i­ty and final­ly a break­down (see Fig­ure 1: the two vari­ables are the employ­ment rate and the wage share of GDP):

Figure 1: Volatility gives way to tranquillity, only to be followed by breakdown (Figure 9 in Keen 1995)

Graph for Calm before a deathly debt storm

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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.