Interest rates are close to zero. It is excessively easy to get credit for consumption or speculation. Corporations are using their profits to buy their own shares rather than to invest. Stock markets are soaring and asset prices are at an all-time high. [This blog was originally published as part of State of Nature “One Question: Economic Crash” forum on 15 January 2018].
While the world economy is growing and there is widespread talk about recovery, especially in Europe, the rates of per capita growth remain below the standards that prevailed before the 2008-9 global financial crisis – not to speak of earlier decades. Productivity is growing slowly and real investments are lagging behind expectations.
This kind of divergence is not unusual for a capitalist market economy. It resonates with tendencies toward financialization and growing inequalities, closely related to contradictory responses by states in the world economy. The basis of genuine economic growth erodes, while the underlying super-bubble grows.
The Minskyan boom-and-bust scheme is simple. Debt leveraging tends to affect the underlying financial valuations and thus enable further leveraging through the wealth-effect, increasing the value of collateral and sustained optimism. Over time the increasing involvement in debt makes the financial system more chaotic, i.e. sensitive to small disturbances. As the quality of debt gradually deteriorates and risks get bigger (however well-hidden they may be), the system becomes more vulnerable. Finally, something happens: a trigger of downward developments emerges, generating rounds of panic, resulting in collapse.
In contrast to 2006-7, many well-known analysts and international organizations from Deutsche Bank to the IMF have been warning about a future crisis that might occur in 2018, but is likely to come about by 2020. Anticipations are reflexive and can have effects on the future. Moreover, some economists believe that central banks have learnt new lessons from their unconventional policies and are now ready and willing to use their – in principle unlimited – resources to prevent a financial collapse from happening. Are we thus safer in the late 2010s than before?
Past lessons and reflexivity have effects through transforming actions and institutions. We are not, however, seeing attempts at re-regulating or taxing global finance, countering rising inequalities, or new programmes of stimulating private and public investments. The Trump administration is giving huge tax benefits to the super-rich and aiming at deregulating finance. Even in the cautious EU, the project of establishing a financial transaction tax seems to have come to an end, and the European financial union is lacking sufficient resources. The rising debt levels in China are an increasing global concern. Meanwhile, the global bubble is growing.
A lot hinges upon central banks, but they are in a contradictory position. The very attempt to tighten policy in order to slow down the growth of the bubble may also set in motion a downward spiral. In the absence of better common policies, regulations and institutions, central banks may actually be less powerful than often thought. Hence Minsky’s ‘it’ (the collapse of the financial and economic system) seems rather likely. If I am right, we are likely to see the biggest crash ever, accompanied by a deep global depression, by 2020 or so.
Heikki Patomäki
