The undead debt and the upcoming mega crash








The dynamics of private debt play a central role in triggering major economic crises, with credit acting as a "zombifier" for some economies. The current situation gives rise to fears of a crash in the next twelve to thirty-six months. Capitalism is an unstable system, with a natural tendency to cycles and crises. This is the central message of the American economist Hyman Minsky (1919-1996), often acclaimed by central bankers and the press since 2008 for his lucid analysis of the causes of crises and cycles. In fact, with the financialization of the economy over the last three decades, violent crises of financial origin have multiplied and their frequency has only accelerated. By 1969, Minsky considered that the major force of the capitalist system is also its main weakness: it encourages risk-taking, which allows innovation and growth. These help to increase the fundamental uncertainty: all economic projects are new, entrepreneurs must make their decisions without being able to affect probabilities to future events. Thus, they can only assume that current trends will continue. Hyman Minsky argues that this leads to sheer investment behavior: agents tend to act in accordance with the beliefs of "the rest of the world, who may be better informed". All this led Minsky (1986) to formulate the "paradox of tranquility": it is during periods of growth, when the memory of past recessions fades, that the capitalists become too optimistic and invest too much. This upward instability leads to recurring cyclical fluctuations. Major depressions occur because of the accumulation of private debts. Since the portion of the desired investment that exceeds private savings is necessarily financed by bank loans, credit contributes to money creation and aggregate demand. During times of optimism, companies use more debt to increase their investment capacity: this is the leverage effect. It contributes to the prosperity of the economy, but that is where the crisis begins to fester. The banks share this optimism and therefore begin to accept debt structures that they would not have accepted before. Many companies then go into more debt to take advantage of the increased leverage and finance projects much more uncertain in terms of future profitability. And until many of them find themselves unable to repay their debts and go bankrupt. Expansion also raises the interest rate on the money market, reducing the viability of investments. Hyman Minsky also expected participants in the stock market to sell stocks in response to perceived asset valuations as excessive, triggering the collapse of the market. To these factors must be added the dynamics of the distribution of income (omitted by Minsky). During periods of expansion, unemployment falls and the production of raw materials and energy increases, exerting upward pressure on the prices of the factors of production. These increases, combined with the debt service, mean that at a certain point the profits are no longer in line with expectations. Investment falls and expansion becomes contraction. Real interest rates (which correspond to the bank rate minus the inflation rate) can then increase, even if nominal rates fall; overall demand falls, leading to stagnant wages and lower raw material costs; and a portion of the debt accumulated during the expansion phase is repaid or defaults. The profit rate then returns to its pre-expansion level and the same process can be repeated, but this cycle starts again with an unpaid private debt residue and a lower share of wages. Another cycle begins, and so on, until the day when financial claims on the economy exceed expenditures. Credit, which was positive and stimulated demand, then becomes negative: this is now called a "Minsky moment". A major crisis ensues. The dynamics of private debt is therefore the major cause of expansions and recessions. This is why most mainstream economists, who neglect the role played by private debt, could not predict the crisis of 2008. And why that's why they will not anticipate the next. Once an economy reaches a high level of private debt relative to GDP and the ratio grows faster than GDP, even a stabilization of this ratio can cause a severe recession. Credit is a serial "zombifier"













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