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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  • ken

    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.

  • Steve Hum­mel

    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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  • Steve Hum­mel

    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.

  • 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.

  • «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.

  • Steve Hum­mel

    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.

  • Steve Hum­mel

    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.

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