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.