When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote.
When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived.
who predict that the current boom is unprecedented in history in that it will never turn into a bust.
Neither of those views is ever correct.
So, in other words, nothing new ever happens.
What happened instead is that the Fed panicked and hit the liquidity button, flooding the system with incredibly cheap money. New money chases inflation, and causes more of it, so it went into housing, and then people started leveraging themselves up into massive debt to buy more of it.
That hasn't happened for two primary reasons.
A) The government inflation figures are bogus. I've posted at some length about this before; you can look up my past history if you want more info. The recent financial threads have had great contributions on that score from other posters as well. Check Heywood Mogroot's contributions, he had some really good stuff on that score. Government inflation numbers are ridiculous fantasy.
B) China and Japan are 'importing' our inflation by keeping their currencies artificially weak against the dollar to improve their exports. They print their currency to buy ours, which artificially overstimulates their own economies. That's the reason Japan has come out of the doldrums from THEIR real estate bubble; they've been suffering for way more than a decade, and they still would be if their central bank wasn't being reckless. They refuse to let the zombie companies die, so their economy never recovers. And Chine is growing at something like 15%/year, which is wildly destructive... growth that fast results in terrible maladjustments.
There's an ancillary reason as well: the advent of globalization is the most powerful deflationary force ever. When you can pay Chinese workers a strand of ramen a day, that makes for remarkably cheap goods. If you track the prices of things that have to be produced locally, like housing and health care and education, the prices are going parabolic.
If there was a really huge increase in liquidity, beyond the bounds of the normal economic cycle, we would expect to see correspondingly huge increase in inflation
We have seen just that. However, with interest rates driven to the floor (here) and through the floor (in Japan), the currency didn't inflate, because leverage was so cheap.
Look at stock prices. Look at commodity prices. Look at real estate. Calculate the core consumer inflation rate using the 1990 or 1995 baskets, not the carefully changed baskets used every year, and the inflation is as clear as day. Better yet, use CPI, which reflects those strange people who actually eat food and use energy, and it's even worse.
Compound that with the horribly skewed income inflation -- if you're a C*O, your income has inflated right along with prices (the rest of us? Fucked.)
We've been living in an inflationary economy -- somewhere between 3 and 7%, for the last eight years. The Feds have tried to hide it, but the data is there. Calculate M3, and it's shows clear as day.
However, this one's been different. Before, inflation would be met with high interest rates, which would drive people to savings. This time, we've done the exact opposite, and not only are people *not* saving, they've spent down their savings. That drove the inflated economy further -- instead of saving, people kept spending.
There's tons of info in the thread associated with this comment.
Keywords to do your own searching on: hedonic adjustments, owner's equivalent rent. If you do your homework, you will find that the government inflation numbers are so divorced from the reality on the ground as to be useless.
The Fed stopped reporting M3 in 2005. That was not for your benefit.
If there was a really huge increase in liquidity, beyond the bounds of the normal economic cycle, we would expect to see a correspondingly huge increase in inflation.
If the cash goes into specific asset classes, then you don't see the inflation in the general economy until people start selling out of those asset classes. Now, which asset class has rocketed upwards in the last decade or so? Clue: US house prices, UK house prices,
Real wealth is stuff... things that are made, and the means of their production. Food, farms, and farm equipment... access to clean water, lumber, spices, luxuries....real stuff. That's wealth.
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