[Home]  [Headlines]  [Latest Articles]  [Latest Comments]  [Post]  [Mail]  [Sign-in]  [Setup]  [Help]  [Register] 

Utopian Visionaries Who Won’t Leave People Alone

No - no - no Ain'T going To get away with iT

Pete Buttplug's Butt Plugger Trying to Turn Kids into Faggots

Mark Levin: I'm sick and tired of these attacks

Questioning the Big Bang

James Webb Data Contradicts the Big Bang

Pssst! Don't tell the creationists, but scientists don't have a clue how life began

A fine romance: how humans and chimps just couldn't let go

Early humans had sex with chimps

O’Keefe dons bulletproof vest to extract undercover journalist from NGO camp.

Biblical Contradictions (Alleged)

Catholic Church Praising Lucifer

Raising the Knife

One Of The HARDEST Videos I Had To Make..

Houthi rebels' attack severely damages a Belize-flagged ship in key strait leading to the Red Sea (British Ship)

Chinese Illegal Alien. I'm here for the moneuy

Red Tides Plague Gulf Beaches

Tucker Carlson calls out Nikki Haley, Ben Shapiro, and every other person calling for war:

{Are there 7 Deadly Sins?} I’ve heard people refer to the “7 Deadly Sins,” but I haven’t been able to find that sort of list in Scripture.

Abomination of Desolation | THEORY, BIBLE STUDY

Bible Help

Libertysflame Database Updated

Crush EVERYONE with the Alien Gambit!

Vladimir Putin tells Tucker Carlson US should stop arming Ukraine to end war

Putin hints Moscow and Washington in back-channel talks in revealing Tucker Carlson interview

Trump accuses Fulton County DA Fani Willis of lying in court response to Roman's motion

Mandatory anti-white racism at Disney.

Iceland Volcano Erupts For Third Time In 2 Months, State Of Emergency Declared

Tucker Carlson Interview with Vladamir Putin

How will Ar Mageddon / WW III End?

What on EARTH is going on in Acts 16:11? New Discovery!

2023 Hottest in over 120 Million Years

2024 and beyond in prophecy

Questions

This Speech Just Broke the Internet

This AMAZING Math Formula Will Teach You About God!

The GOSPEL of the ALIENS | Fallen Angels | Giants | Anunnaki

The IMAGE of the BEAST Revealed (REV 13) - WARNING: Not for Everyone

WEF Calls for AI to Replace Voters: ‘Why Do We Need Elections?’

The OCCULT Burger king EXPOSED

PANERA BREAD Antichrist message EXPOSED

The OCCULT Cheesecake Factory EXPOSED

Satanist And Witches Encounter The Cross

History and Beliefs of the Waldensians

Rome’s Persecution of the Bible

Evolutionists, You’ve Been Caught Lying About Fossils

Raw Streets of NYC Migrant Crisis that they don't show on Tv

Meet DarkBERT - AI Model Trained On DARK WEB

[NEW!] Jaw-dropping 666 Discovery Utterly Proves the King James Bible is God's Preserved Word

ALERT!!! THE MOST IMPORTANT INFORMATION WILL SOON BE POSTED HERE


Status: Not Logged In; Sign In

Business
See other Business Articles

Title: Fragility And Instability Are Part Of Global Capitalism And We Have Done Very Little To Address This
Source: World Political Economy
URL Source: http://www.worldpoliticaleconomy.com/site/?p=517
Published: Mar 26, 2012
Author: Riaan Nel
Post Date: 2016-04-29 04:42:02 by A Pole
Keywords: wages, money, debt
Views: 725
Comments: 9

“A sophisticated, complex, and dynamic financial system such as ours endogenously generates serious destabilizing forces so that serious depressions are natural consequences of noninterventionist capitalism:  finance cannot be left to free markets”  (Hyman Minsky, 1986) 

During the 80’s and 90’s the above quote by Minsky was very controversial.  That was the zenith of the “free markets” ideology – the notion that the less government interferes with the market the more efficient the market will allocate resources.  To a large degree I still agree with this basic notion; however, it is my belief that finance and investment do not work well in a non-interventionist environment.  Hyman Minsky’s theory about capitalist development and financial instability is how I view global finance in general, and how I view investment strategy specifically.  

From Minsky’s perspective the economy was a complex, time-dependent system.  He saw society as an “evolutionary beast,” changing in response to endogenous forces.  According to Minsky the fundamental determinant of the path of capitalist development is the institutional structure of the political economy.  It is this structure that regulates, facilitates, influences and constrains political economic activity.  Consequently, capitalism has many varieties.  In Minsky’s thinking time-dependency is an important structural variable of contemporary capitalism – production precedes exchange, and finance precedes production.  Thus, credit creation is at the center of capitalist development. 

Another important element of Minsky’s approach was the importance of profit-driven structural change.  Minsky had long argued that present and prospective profits influence economic activity within the context of a given institutional structure.  Most contemporary economic theories see finance and credit creation as merely a facilitating process within the economy.  This view ignores the fact that financial firms are also profit-seeking institutions, and that credit creation is a production process in and of itself.  Moreover, credit creation is a profit-seeking production process that precedes other production activities in time.  The financial system takes on special importance according to Minsky’s theory of capitalist development since the system exerts a strong influence on business activity, and is also prone to innovations in profit driven credit production.  Another essential element in Minsky’s theory is public policy.  In Minsky’s view capitalist development cannot be understood without incorporating government policy.  Government policy is an inescapable determinant of the path of  capitalist development.  In summation – a particular capitalist political economic system is created by profit-seeking credit creation, preceding other capitalist production and distribution processes, as well as government policy.  

Minsky identified five stages in the historical evolution of capitalism in the US. 

  1. Merchant Capitalism (1607-1813)
  2. Industrial Capitalism (1813-1890)
  3. Banker Capitalism (1890-1933)
  4. Managerial Capitalism (1933-1982)
  5. Money-Manager Capitalism (1982 – present)     

Due to postwar prosperity and the Federal Reserve System stepping in as a lender of last resort through monetary interventions, the financial system became more fragile.  The fragility stemmed from increased risk taking due to reductions in margins motivated by consistent Federal Reserve interventions.  Lender of last resort interventions and prosperity also encouraged greater reliance on debt financing, and a turn toward short-term financing.  The current phase of US capitalism according to Minsky evolved  due to an exponential increase in the activities of finance companies and non-bank financial institutions.  Concomitantly, we witnessed an increase in financial innovations like securitization and off-balance sheet entities (the rise of the shadow banking system).  Money-Manager Capitalism supplanted Managerial Capitalism due to the rising importance of managed-money funds – pension funds, mutual funds, bank trust funds, etc.  Where corporate managers were the “masters of the private economy,” money-managers on Wall Street became the new “masters of the universe.”  Between 1950 and 1990, money managers saw the fraction of US corporate equities under their control grow from 8% to 60%.  Over the same period, pension funds increased their ownership of US business stock from 1% to 39%, and also increased their percentage ownership of US corporate bonds from 13% to 50%.  These percentages grew through the 1990’s into the 2000’s.  

Money managers’ raison d’être is to maximize return for investors in their funds, making them increasingly sensitive to short-term profits and the stock-market valuations of their firms.  The increase in the number of institutional investors provided ready buyers for securitized investments.  Throughout the period of Money-Manager Capitalism government policy had two characteristics, namely lender of last resort stabilization and a dismantling of the New Deal’s financial regulations in line with the financial growth model. In 1990 Minsky contended that Money-Manager Capitalism was going global, and that it was rendering obsolete the notion that trade patterns determined short-run foreign exchange rates.  He pointed out that global Money-Manager Capitalism would require a division of responsibilities to maintain stability.  Hegemonic stability by one power would not suffice.  In 1995, a year before his passing, Minsky hinted at the future of global Money-Manager Capitalism.

 “Global financial integration is likely to characterize the next era of expansive capitalism.  The problem of finance that will emerge is whether the financial and fiscal control and support institutions of national governments can contain both the consequences of global financial fragility and an international debt deflation”  

At this junction I would like to define “capitalism” since the implication of Minsky’s theory of capitalist development is that contemporary capitalism is essentially a financial system.  While there is little consensus on a definition, many definitions focus on the fact that capitalism is an economic system characterized by private property rights and the seeking of a profit.  The following is a common definition of capitalism. 

      ”[Capitalism is a]n economic arrangement, defined by the predominant existence of capital and wage labor, the former consisting of accumulation in the hands of private (i.e. non-governmental) owners, including corporations and joint stock   companies, the latter consisting in the activities of laborers, who exchange their labor hours (or, according to Marxian theory, their labor power) for wages, paid from the stock of capital.  The capitalist extracts not a wage but a profit, by realizing in a market the value of the goods produced.  Capitalism presupposes private property in the means of production, a market economy, and the division of labor” (Scruton, 1982).

 What is missing from the above definition is the clear explication that capitalism is essentially a financial system.  Moreover, the peculiar behavioral attributes of a capitalist political economy center around the impact of finance upon system behavior.  Mehrling (2000) provides a succinct explanation of Minsky’s conceptualization of capitalism as being essentially a financial system.  In a capitalist economy every economic unit – every firm, household, individual, government and nation – is in essential respects like a bank facing the problem of daily balancing cash inflows against cash outflow.  The key problem that every economic unit faces is the “survival constraint,” which necessitates that cash outflows not exceed cash inflow.  All individual economic units each and every day have to make a multitude of decisions to meet this constraint, and these decisions in aggregate influence the structure of the capitalist system. 

Because of the nature of capitalist production and distribution, economic units invariably face cash flow issues when cash flow falls short of required or desired outflows.  Economic units require a source of refinance that will allow them to promise future cash flow in exchange for credit to meet current cash flow requirements.  For Minsky the heart of the financial system, and by extension the heart of the capitalist system, is the money markets.  The money market is the place where economic units meet one another to adjudicate their competing needs to refinance.  The most critical asset-price in the political economy is the price of refinance – the short-term money market rate of interest.  The money market is the place where the coherence of the entire system is tested daily. 

What appear to us as assets are in actuality nothing more than expectations about future cash flows.  Minsky distinguishes between two types of capital assets, namely financial capital assets and non-financial capital assets.  A financial capital asset is two-sided since it is comprised of future cash outflows from a debtor and future cash inflows to a creditor.  All other assets are only one-sided since the receiver of future cash flows receives the flows from the production and distribution process.  If economic units aim to meet their survival constraint by keeping their cash outflow within the limits of their cash inflows emerging from their ownership of non-financial assets, the system is stable.  However, capitalism requires credit or financing.  This is where Minsky’s concept of time-dependency comes into play.  Before most products or services can be distributed they have to be produced; however, production and distribution will require cash outflow before cash inflows are realized.  Credit needs to be accessed to facilitate the process.  Credit is also accessed by economic units to achieve more than otherwise possible by merely matching current cash outflows with inflows.  For instance, most households would never be able to afford the luxury of a modern home if not for exchanging their future cash inflow for present cash outflow through a mortgage.  By the same token, governments and politicians aim to increase the standard of living of their nations by accessing credit through deficit spending.

 Credit is about the issuing of financial assets to trade future cash flows – for instance government bonds are issued to finance government programs over and above current tax inflows, with the promise to use future tax inflows to redeem the bonds at maturity.  A crucial point about borrowing and credit in Minsky’s theory is that it does not relax the survival constraint of a particular state-society complex in the aggregate.  This is due to the two-sided nature of financial assets – they only transfer the constraint from one economic unit to another.  The only way for a state-society complex to relax the survival constraint in the aggregate is through the creation of new non-financial capital assets through investment. 

 On the level of analysis of individual economic units the incentive of investment is the expectation that current investment will be profitable in the future, i.e. the future cash inflows are expected to exceed by some margin the cash payment commitments required to finance the initial investment.  This represents a potential relaxation of the survival constraint, thereby functioning as a powerful incentive factoring into the decision making of individual economic units.  However, these decisions cause instability on the aggregate level – what Minsky refers to as “upward instability”. 

 This “upward instability” lies at the heart of his theory of financial instability.  Minsky originally referred to the process of fragility over time in the capitalist system as the financial instability hypothesis.  The cause of the instability is obvious – some investments work out and others do not, but the debt-financed owners of both face the same cash commitments.  Think of Greece’s recent struggles to meet their debt servicing commitments due to poor governmental investment.

 “At the aggregate level, the natural upward instability of the system leaves behind a residue of financial commitments that pose problems for the continuation of growth.  At the individual level, these problems take the form of a sharply binding survival constraint that forces distressed units to reduce expenditure, sell assets, and/or borrow at high interest rates, all in order to raise cash to meet immediate commitments.  At the level of the market, the problems            of individuals are reflected in conditions in the money market, which means at the very least a higher price of refinance, and at the worst a disruption and even breakdown of exchange.  If the money market is the heart of the system, then financial crisis is the heart attack”  (Mehrling, 2000).

 If the premise is accepted that the current political economic system is financial in nature, then the financial crisis represents a challenge to the structural cohesion of the entire system.  As a challenge to the “efficient market hypothesis”, which is the dominant financial economic theory of our time, Minsky formulated his “financial instability hypothesis.”  The efficient market hypothesis states that individuals may guess asset prices wrong, but the market as a whole gets them right.  Minsky’s hypothesis claims the financial structure of a capitalist political economy becomes more fragile over a period of prosperity.  As the economy grows and profits increase those businesses in highly profitable areas of the economy are rewarded handsomely for increasing the amount of debt they use.  This success encourages others to increase their leverage so as to increase their profits.  The increasing profits fuel the creation of credit as lenders are satisfied by the ever increasing profits regarding borrowers’ ability to repay the loans. 

 The capital development of a capitalist economy is accompanied by exchanges of present money for future money. Present money finances the resources for the production of investment output. Future money is the profit that will accrue to the owners of capital assets. Investment by producers is financed through liabilities. Money is connected with financing through time, with banks and financial intermediaries as the central players. The key economic exchanges are the negotiations between financial intermediaries and businesspeople.  These negotiations revolve around the cost and profit expectations of businesspeople.  Money flows from depositors to banks, and then from banks to firms and companies needing investment financing. Money also flows from investors to investment funds, and from these funds to companies or governments needing investment finance.  At a future date the flow is from firms, companies and governments back to banks and funds, and then to the depositors and investors.  This flow is important to understand since it explains the linkage between the creation and ownership of capital assets on the one hand, and the structure of financial relations and changes in this structure on the other.  The financial instability hypothesis attempts to explain the impact of debt on system behavior. Bankers (the generic term Minsky uses to depict all financial intermediaries) are key players in his theory as merchants and innovators of debt.

 Minsky identifies three different types of income-debt relationships, namely, hedge, speculative and Ponzi finance.  Hedge Financing Units can fulfill all of their contractual payment obligations by their cash inflows.  These Units’ cash inflow allow them to pay both interest and principal on their liabilities.  However, as economies, earnings and profits grow – over protracted periods of good times – the economy will transit to a structure with an increase in so-called Speculative Finance UnitsSpeculative Finance Units can meet their payment commitments, although their cash inflow will not allow them to repay the principle, requiring them to roll over their liabilities. The US government is the largest Speculative Finance Unit in the world.  It can make interest payments on all outstanding US bonds, but does not have adequate cash inflows to honor redemptions at maturity.  When older bonds come due, new Treasuries are issued to honor redemptions.  Lastly as the economy continues to prosper, more Ponzi Financing Units will become part of the structure.  Ponzi Financing Units cannot fulfill either repayment of principle or the interest due on outstanding debts from cash inflows from operations, requiring them to borrow more to pay interest commitments, or sell assets to fulfill commitments.  Regarding these three debt regimes Minsky (1992) states:

 “It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.”

 A Minsky Moment occurs when Ponzi Financing Units are forced to sell assets to meet their obligations.  It is that moment in the business and credit cycle when financing units have such severe cash flow problems due to the increasing debt that large scale selloffs begin which leads to a precipitous collapse of market prices and a sharp drop in market liquidity.   The phrase “Minsky Moment” was coined by Paul McCulley, a director at Pacific Investment Management Company during the 1998 Russian debt crisis.  Although McCulley originated the term it is George Magnus, senior economic advisor at UBS that offers perhaps the most succinct explanation. 

 ”…the stage is first set by ‘a prolonged period of rapid acceleration of debt’ in which more traditional and benign borrowing is steadily replaced by borrowing that depends on new debt to repay existing loans.  Then the ‘moment’ occurs, ‘when lenders become increasingly cautious or restrictive, and when it isn’t only overleveraged structures that encounter financing difficulties.  At this juncture, the risks of systemic economic contraction and asset deprecation become all too vivid.’ “

 Both Bear Stearns and Lehman Brothers are examples of Ponzi Financing Units that collapsed during a Minsky Moment in 2007.  Greece is the prime example of a country that is a Ponzi Financing Unit requiring a bail out by an EU and IMF rescue package during its Minsky Moment.  Households that purchased homes with no-down payment mortgages at teaser rates, depending on an increase in the value of the home to refinance in the future to affordable payments, are also examples of Ponzi Finance Units.  There is wide concern by purchasers of US Treasuries that the US government is about to become a Ponizi Financing Unit.  If the US government should have a Minsky Moment the current global political economic system might collapse.

 I remain of the opinion we have done very little to address this inherent instability of our economic and financial system. 

 

Important Information:

This article was written by Mr. Nel in his capacity as a freelance global political and economic journalist and editor of www.World-Political-Economy.com, a commentary blog site.  Mr. Nel’s strategy comments are made independent from his position as managing partner of Detlefsen Nel & Associates, and are not endorsed by the firm.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  

Click for Full Text!(1 image)

Post Comment   Private Reply   Ignore Thread  


TopPage UpFull ThreadPage DownBottom/Latest

Begin Trace Mode for Comment # 2.

#1. To: A Pole (#0)

Something that has not been done in any notable manner is an economic analysis of the economic system prescribed by God to ancient Israel in the Torah, and recalled repeatedly by the Prophets until its restatement by Jesus.

Aspects of it have been emphasized, overemphasized and underemphasized, but there has been no comprehensive work of note that describes how it all works together in economic terms.

The reason not is that only religious people study those texts in sufficient depth to be able to discern the position, and the religions themselves have rejected God's economic plan and developed thick traditions whereby they can ignore it and substitute their own judgment. So Gods economics remain as inert words on a page, mostly unused.

It is my belief that the way out of the seemingly intractable mess in which we find ourselves, whether communist, capitalist, socialist or traditionalist, is by reading God's economics as inspired and actually applying the entire program.

Since that cannot be even thought of sight unseen, first thing to do is to lay out God's economics.

But here, immediately, we run into crushing opposition before we start. Atheists, agnostics and economic professionals do not care - they think it's all bunk and not worth the time. And Jews and Christians have spent such fantastic amounts of energy over the millennia devising doctrines to overthrow God's law of economics, and to ignore and suppress it, and to tell themselves that it's ok to do so, that the instant one begins to present that law, the Christian will start to throw out objection after objection - many of them quite old - all to escape from God's wisdom on the subject. The Jew will just shrug his shoulders and walk away.

So, God can't get a fair hearing unless some brave soul is willing to be just absolutely pounded upon and vilifed by people claiming to be children of God, but who think of themselves as grown up children who will not be governed by their Father when it comes to MONEY. Contributions are good enough.

Still, I'm in a particularly contrary mood lately, so I think I will go ahead and put out God's economics, the whole structure, to give atheists and Christians something to sneer at. (Which means, in the latter case, give Christians the opportunity to sneer at ME, because they won't directly sneer at God in word, just in deed.)

I'll begin later today.

Vicomte13  posted on  2016-04-29   6:59:04 ET  Reply   Untrace   Trace   Private Reply  


#2. To: Vicomte13 (#1)

It is my belief that the way out of the seemingly intractable mess in which we find ourselves, whether communist, capitalist, socialist or traditionalist, is by reading God's economics as inspired and actually applying the entire program.

You are right. What we need to do immediately is trash our economic system and replace the federal reserve with the Vatican Bank!

What could possibly go wrong?

sneakypete  posted on  2016-04-29   13:07:10 ET  Reply   Untrace   Trace   Private Reply  


Replies to Comment # 2.

#4. To: sneakypete (#2)

You are right. What we need to do immediately is trash our economic system and replace the federal reserve with the Vatican Bank!

Well, that's a ridiculous proposal. Certainly that's not God's economics.

Vicomte13  posted on  2016-04-29 15:32:19 ET  Reply   Untrace   Trace   Private Reply  


End Trace Mode for Comment # 2.

TopPage UpFull ThreadPage DownBottom/Latest

[Home]  [Headlines]  [Latest Articles]  [Latest Comments]  [Post]  [Mail]  [Sign-in]  [Setup]  [Help]  [Register] 

Please report web page problems, questions and comments to webmaster@libertysflame.com