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 a professional economist 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 debts accumulated in Australia, 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

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  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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