I have now started to work my way through Minsky’s papers in “Can “It” Happen Again?: Essays on Instability and Finance” and I began to wonder what Minsky would make of “Solvent Land” – a world without debt.
If he could visit this wonderful place, would he see different economic rules at work?
Cushioning financial instability
In the essay with the title of the book “Can IT Happen again”, Minsky says that the depression of the 1920s is unlikely to happen again for 2 reasons:
1 We now have central banks which see their role as intervention as a “lender of last resort” to avoid the banking sector being destroyed. We have seen this most recently in the 2008 financial crisis when, not only was money lent to banks, but in the UK money was invested in banks by the government, rather than letting any bank crash (as had happened bank in the 1920s).
2 The public sector is now much larger than it was in the 1920s and its size acts as a cushion against depressions. What happens is that as private enterprise stops paying people, the public sector takes over (through social security or through public works – in Minsky’s paper he refers to defence spending).
If he were to look at solvent land would he see the same ability to cope with financial cycles or is a world without debt more prone to depressions? The answer is mixed:
1 In a world without debt you do not need a “lender of last resort.” Whilst in theory a vault-minder could crash, this would not bring down the whole system. The doubloons being minded would still exist and would simply have to be transferred to a new minder. The point here is that doubloons never belong to the vault-minder, he is simply recording their existence.
2 In a world without debt, the public sector would not be able to run a deficit except to the extent that it had accumulated doubloons from running unused surpluses in previous periods. So its ability to cushion the effects of financial instability would be restricted.
Causes of financial instability
But on the other hand, Minsky’s analysis of the crises he had seen (in the US) in the 1960s 1970s and 1980s was that they were the result of our financial system (see his paper “Finance and Profits” in the same collection of essays).
He sets up a number of different types of debt finance and explains that as the economy moves through a cycle the balance between these different types of debt finance changes. So the cycle starts with mostly “hedged” finance well covered by expected future cash flows, moves towards “speculative” finance which has some negative but mostly positive future cash flows through to significant amounts of “Ponzi” finance which has negative future cash flows and relies on inflation in asset values and the sale or refinancing of the asset for the finance to work at all.
But in world without debt there can be no “hedged” finance let alone the “Ponzi” finance which leads to recession and could lead to depression.
So a world without debt would also appear to be immune to the current economic cycles which we experience.
Must do better
At the conclusion of his paper “Finance and Profits” Minsky says:
The final conclusion that emerges is that… the problems reflect the normal way our type of economy operates…. If we are to do better it is necessary to reform the structure of our economy so that the instability due to a financial structure heavily weighted with debt is diminished.
Solvent land looks forward to a visit from Steve Keen in the near future.