Why the US can’t escape Minsky

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My call a few weeks ago that the global financial crisis is over was very much an Anglo-centric one, and a US-centric one in particular (Closing the door on the GFC, March 10).

Europe’s continuing own goal from the euro and austerity, and credit excesses in emerging economies, could still derail a global recovery. But the epicentre of the crisis was the US, and the indications are solid there that this particular ‘Minsky moment‘ is behind it.

It might be felt that Minsky is irrelevant, now that the economy has begun its recovery from this crisis. But in fact this period — in the immediate aftermath to a crisis, when the economy is growing once more, and debt levels are only just starting to rise — is precisely the point from which Minsky developed his explanation of economic cycles.

In his own words: “The natural starting place for analysing the relation between debt and income is to take an economy with a cyclical past that is now doing well.

“The inherited debt reflects the history of the economy, which includes a period in the not too distant past in which the economy did not do well.

“Acceptable liability structures are based upon some margin of safety so that expected cash flows, even in periods when the economy is not doing well, will cover contractual debt payments.

“As the period over which the economy does well lengthens, two things become evident in board rooms. Existing debts are easily validated and units that were heavily in debt prospered; it paid to lever.”

So the US hasn’t escaped Minsky — it can’t. Minsky’s message is for the whole financial cycle, not just the moment when it turns nasty. At the moment, we’re in the nice phase of Minsky’s cycle, when it pays to lever. Leverage is clearly on the rise, as Figure 1 indicates.

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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.
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9 Responses to Why the US can’t escape Minsky

  1. ken says:

    It looks like the level of interest payments required for a recession has been dropping, except for the last one. Possibly this time we will have a recession at only 7-8% GDP for interest payments.

  2. Steve Hummel says:

    “It certainly won’t be 17 years before the next Minsky moment.”

    Yes. And the two factors that will guarantee that shortening are:

    1) Technological innovation will speed up the entire economic process and exacerbate the still unacknowledged problem of the real (present) time scarcity of individual incomes in ratio to prices simultaneously produced and
    2) …that in reality is the elemental and so continuously actual state of the economy FOR the mass of individuals….which means that scarcity will become ever more pressing

  3. Pingback: Why the US can’t escape Minsky | Borrowing Ideas

  4. Steve Hummel says:

    The empiricism at the heart of Social Credit theory is just the antidote for all of the economic religiosity rife in the minds of every DSGE economist virtually everywhere, and the well intentioned yet to one extent or the other, unfinished iconoclasm of instability theorists.

    Symmetry is another word for reflection, balance and equilibrium in nature, in Man and in human systems. The primary asymmetry in economic and monetary theory is with the private banking license whose paradigm is debt, and its TRUE reflection, balancing and equillibrating idea is not “free” money injected back into commerce/the economy by Banks or the government….but an actual gift of purchasing power given directly and priorly to the individual.

  5. Blissex says:

    It would help in general if this blog always reminded readers that at its core the Minsky cycle is a *politically* driven cycle, something that matters a great deal, because minimizing the disruption caused by Minsky cycles is a political decision.

    The politics of the Minsky cycle are driven by those vested groups who profit from volatility and tail risk and self-dealing, that is most of the USA managerial class and financial class.

    I think also that you are a bit optimistic about this:

    «There’s plenty to invest in right now — biotech, nanotech, 3D printing, electric vehicles, the recovery itself — and at least some of that borrowed money should be fuelling genuine investment in industry.»

    Because all those are tiny, unprofitable sectors compared to “investing” in leverage itself, as the people who profit from volatility, tail risk and self-dealing love to do.

    Seen from a European perspective the “exceptionalism” of the USA economy has always been in the past that it had a very large and profitable extractive component, where the “mining” of cheap-to-extract natural resources, be them metals, oil, water, the fertility of the land, was the main driver of very high profits.

    Now the USA is all physically mined out (the “tight” oil and gas may be perhaps abundant but it is very expensive to extract), and so the USA managerial and financial elites have switched to “mining” accumulated capital, with several rounds of highly profitable asset stripping, and they drive hard the Minsky cycle to facilitate that asset stripping.

    Because it is far more profitable, and far quicker at delivering those profits, than any investment in research or industry.

    This is probably in part driven by the application of the BCG matrix to whole economies or regions: most of the USA economy is probably rated as “dog” by most USA elites, and the BCG precription is never to invest in a “dog” economy, but to liquidate any capital tied up in it.

  6. Blissex says:

    «each Minsky cycle tends to start from a higher level of debt than the preceding one, making the economy more fragile.»

    I have to call this in its current incarnation the debt-collateral spiral, in part for analogy with the price-wage spiral, in part because its characteristic is that it is based on the formal respect of technical accounting rules based on collateral valuations, which masks the ever rising risk of leverage.

    The clever idea of our contemporary Minsky supercycles is that it is possible in accounting terms to mask the riskyiness of high leverage ratios by pointing out that the value of the collateral lenders have for the credit they extend well covers that credit.

    The cleverness in that is that the valuation of the collateral is driven by the growth of credit itself, so that the more credit grows, the more the nominal valuation of its collateral grows, without the collateral itself changing one bit.

    This is most obvious in the Minsky cycle of residential property leverage, where the very same physical building may be accounted as fully secure collateral for twice the level of debt every few year, as residential property prices are driven up by the easy availability of the same credit.

    The debt-collateral spiral is a stupendous device to return immense profits to those vested interests that profit from high volatility, tail risk and self-dealing, and that therefore drive the Minsky cycle as hard as they can.

  7. Steve Hummel says:

    Yes Blissex. Your “debt-collateral spi­ral” is actually acknowledgment of the reality of C. H. Douglas’s A + B theorem.

    The Debit/Credit symmetry of accounting is indicative of its naturalness/equilibria. But there are asymmetries/disequilibria more deeply recognized within that symmetry.

    Now A + B was derived by C. H. Douglas from the empirical cost accounting data of over 100 businesses that were profitable. Using the terms “cost accounting” very much results in what Dr. Keen has referred to as the MEGO (my eyes glaze over) effect.

    Not in any way to diminish Douglas’s insight, but in an attempt to directly point at the current elemental and hence unchanging monetary and economic reality of all economies I propose the following corollary to A + B:

    eE/P = In < mC/Pr

    The entirety (both individual enterprises and the economy as a whole) of the Economic/Productive process (that is including every moment of it) equals total INDIVIDUAL incomes being less than minimal total Costs/Prices.

    Consequently the economy is inherently monetarily unstable.

    Cost cannot be escaped in commerce/the economy.

    Labor costs (wages, salaries and dividends) are never equal to total costs and yet because all costs must go into price, in the normal flow of the economy, the rate of flow of costs/prices will always exceed the rate of flow of INDIVIDUAL incomes simultaneously created.

    Money apparently circulates in the economy, but in reality because using business revenues sequentially as income….still leaves a trail of unpaid debt/overhead expenses that must be garnered by businesses…that is if they want to be able to pay their actual expenses and so remain in business.

    And the only way that this inherently unstable system/situation can be "remedied" (read palliated) is to continuously borrow.

    However, stabilizing and equillibrating the basic ratio between INDIVIDUAL incomes and costs/prices with a credit form that does not increase costs/prices, i.e. a GIFT of money to the individual…would
    do just that.

    Think universal dividend.

  8. Steve Hummel says:

    My above post could be entitled:

    Why the world and commerce cannot escape Douglas.

    And another corollary to A + B:

    C of FI < C of Fu of Sys = ? Sys XFu

    Consideration of the economic freedom of the Individual is always less than the consideration of the Functioning of the System Which is why the System actually does not Function.

  9. Pingback: More debate about who predicted the Great Recession, and lessons learned | Fabius Maximus

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