For sev­en years now, the rate The Fed sets to deter­mine the price banks pay to bor­row from it and from each oth­er has been zero, or so close to zero that the dif­fer­ence is imma­te­r­i­al. This is, his­tor­i­cal­ly speak­ing, not nor­mal, and The Fed has a des­per­ate desire to return to what is nor­mal, which is rate a few per cent above the rate of infla­tion (see Fig­ure 1).

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One thing my 28 years as a card-car­ry­ing econ­o­mist have taught me is that con­ven­tion­al eco­nom­ic the­o­ry is the best guide to what is like­ly to hap­pen in the econ­o­my.

Read what­ev­er it advis­es or pre­dicts, and then advise or expect the oppo­site. You (almost) can’t go wrong.

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There was a time when most edu­cat­ed peo­ple knew that the Earth was the cen­ter of the uni­verse. There was a sophis­ti­cat­ed “Geo­cen­tric” mod­el, known as the “Ptole­ma­ic sys­tem”, that pre­dict­ed to very high accu­ra­cy the observed move­ment of all the objects in the Heav­ens, as they pur­port­ed­ly orbit­ed the Earth on per­fect crys­talline spheres. 500 years ago, any­one who pro­posed an alter­na­tive model—in which the Sun was the cen­ter and the Earth was just anoth­er plan­et orbit­ing it—was derid­ed as a heretic and a mad­man.

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In this post I con­sid­er the econ­o­my in gen­er­al: I’ll cov­er asset mar­kets in par­tic­u­lar in the next col­umn, but you’ll need to under­stand today’s post to com­pre­hend the stock and prop­er­ty mar­ket dynam­ics at play. Hav­ing said that, the Shang­hai Index fell anoth­er 7.5% on Tues­day, after los­ing 8.5% on Mon­day, and is now down over 45% from its peak—so I’ll try to write the stock-mar­ket-spe­cif­ic post by tomor­row. In this post I’ll show, very sim­ply, why a slow­down in the rate of growth of pri­vate debt will cause a cri­sis, if both the lev­el and the rate of change of debt are high at the time of the slow­down.

As I not­ed in last week’s post “Is This The Great Crash Of Chi­na?”, the pre­vi­ous crash of China’s stock mar­ket in 2007 lacked the two essen­tial pre-req­ui­sites for a gen­uine cri­sis: pri­vate debt was only about 100% of GDP, and it had been rel­a­tive­ly con­stant for the pre­vi­ous decade. This bust how­ev­er is the real deal, because unlike the 2007-08 crash, the essen­tial ingre­di­ents of exces­sive pri­vate debt and exces­sive growth in that debt are well and tru­ly in place.

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Chi­na’s sec­ond stock mar­ket crash will be its first ful­ly fledged eco­nom­ic cri­sis

Chi­na has achieved a remark­able trans­for­ma­tion in the last 30 years—something that you can only ful­ly appre­ci­ate if, like me, you vis­it­ed Chi­na before that trans­for­ma­tion began. In 1981/82, I took a group of Aus­tralian jour­nal­ists on a tour of Chi­na on behalf of the Aus­tralia-Chi­na Coun­cil. The key pur­pose was to take part in a sem­i­nar with Chi­nese jour­nal­ists under the aus­pices of the “All-Chi­na Jour­nal­ists Asso­ci­a­tion”. Giv­en the unfor­tu­nate acronym by our Chi­nese hosts of SAPS—for the “Sino-Aus­tralian Press Seminar”—it was the first sem­i­nar between Chi­nese jour­nal­ists and those of any oth­er nation.

For the next two days, I’m tak­ing part in a pecu­liar­ly British insti­tu­tion (and I’m start­ing to real­ize just how many pecu­liar British insti­tu­tions there are) called “Clear­ing”. This is where Uni­ver­si­ties towards the bot­tom of the sta­tus peck­ing order here in the UK offer places to stu­dents who didn’t get good enough marks to get into Uni­ver­si­ties towards the top of the peck­ing order.

I’ve just put A$10,000 of my own mon­ey towards improv­ing Min­sky, the Open Source pro­gram I have designed to enable econ­o­mists to cre­ate dynam­ic and mon­e­tary mod­els of the econ­o­my. If you sup­port the work I’m doing to help eco­nom­ics escape its 19th cen­tu­ry equi­lib­ri­um fetish, please con­sid­er also mak­ing a dona­tion to Min­sky’s devel­op­ment via Dr Rus­sell Stan­dish’s Pay­Pal account (or via direct deb­it, using the account details you’ll find below):

This is the talk I gave at the FT/Alphaville con­fer­ence in Lon­don last week. A num­ber of peo­ple asked me to send the PPT to them, and I got buried in oth­er work and the emails are long lost in my Gmail queue. So if you’d like to down­load the pre­sen­ta­tion file, please click here. My apolo­gies to those cor­re­spon­dents to whom I haven’t replied direct­ly.

To run the Min­sky mod­el, down­load Min­sky from here and install it.

The Greek ref­er­en­dum has deliv­ered a stun­ning vic­to­ry for Syriza and its anti-aus­ter­i­ty mes­sage. Despite the banks being closed as a result of the ECB lim­it­ing its pro­vi­sion of ban­knotes, and despite a unit­ed cho­rus of Euro­pean lead­ers warn­ing of dire con­se­quences if the No vote suc­ceed­ed, the Greeks have vot­ed No in over­whelm­ing num­bers. The final result looks like­ly to be a 62% No to 38% Yes rejec­tion of the Troika’s terms. Syriza now has over­whelm­ing sup­port from the Greek peo­ple to oppose the Troi­ka (a result that opin­ion polls got com­plete­ly wrong).

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