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.