The “Nice Phase of Minsky’s Cycle”

It’s kind of ironic to think of all the time and money that went into all those high frequency trading computers (i.e., the hardware design and the software development that must have both been cutting edge) that have been the subject of much debate at 60 Minutes and CNBC over the last few days, that is, when you think of them in relation to the U.S. economy.

Yes, that computer hardware and software added to the nation’s economic output as did all the talk on TV, but it’s all part of the recent epidemic of unhealthy growth that constitutes the current “recovery” as NYSE margin debt seems to make new all-time highs with every passing week and analysts hail the return of higher levels of borrowing by consumers.

In this Business Spectator report, Steve Keen reminds us why we “can’t escape Minsky” and why reality is different than perception.

It might be felt that Minsky is irrelevant, now that the economy has begun its recovery from this crisis. But in fact this period — in the immediate aftermath to a crisis, when the economy is growing once more, and debt levels are only just starting to rise — is precisely the point from which Minsky developed his explanation of economic cycles.
…
Minsky’s message is for the whole financial cycle, not just the moment when it turns nasty. At the moment, we’re in the nice phase of Minsky’s cycle, when it pays to lever. Leverage is clearly on the rise, as Figure 1 indicates.

The acronym “DCED” stands for debt contribution to effective demand and measures the annual change in private debt divided by GDP.

There are a couple more charts that are both pretty interesting and some commentary about why the last “Minsky cycle” started in the early 1990s rather than a decade ago.

You can see this in the chart above where overall debt-to-GDP really didn’t dip much in the early-2000s because the American consumer quickly picked up where corporate American left off reckless-borrowing-and-spending-wise.