Debt |

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.

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Via this item at where someone took the time to read through this report from the World Gold Council on the subject of risk management and capital preservation comes the chart below where, clearly, they’ve got the correct caption.

I’d read about gold’s share of financial assets then and now (i.e., back in 1980 as compared to today), but this is the first time I’ve seen it in chart form and it’s a real eye-opener.

Once again, this reinforces the little acknowledged fact that the financial world has changed rather dramatically in recent decades (and perhaps not for the better given that booms and busts seem to be a regular part of the landscape).

More Troubling Student Loan Data

This Econbrowser update by Economics Professor James Hamilton on the nation’s record rise in student loans over the last half-decade or so is chock-full of all sorts of disturbing data, such as, the first chart that depicts the near doubling in outstanding student loans as a share of GDP from below 4 percent to over 7 percent.

There’s also a good discussion about how the Education Department gets borrowed money from the Treasury Department in order to lend that money to students, many of whom either don’t graduate or make much less after they get their sheepskin than they thought, making it difficult (if not impossible) to pay that money back.

It seems Education has become one Treasury’s better customers as illustrated below.

The stat of the day is this gem:

The outstanding balance borrowed by the Treasury on behalf of the Department of Education’s student loan programs comprises 7% of the $12 trillion in debt owed by the Treasury to the public as of the end of last fiscal year, and by itself accounts for 20% of the growth in Treasury debt during that fiscal year.

Of course, this isn’t going to end well – for students or the government.

In fact, it’s already not ending well as default rates are soaring and an entire generation is souring on the American dream that has turned into being saddled with debt for the foreseeable future in yet another legacy of the present era of easy money in the U.S.

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$100 Trillion in Debt – A Big Round Number

The Bloomberg headline reads:

Global Debt Exceeds $100 Trillion as Governments Binge, BIS Says

and, along with the graphic below from the associated BIS report(.pdf), that should serve as the latest warning to financial markets around the world that things aren’t as rosy as the recent rise in virtually all asset prices might imply.

Writes the BIS:

Not surprisingly, given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers (Graph C, left-hand panel). They mostly issue debt in domestic markets, where amounts outstanding reached $43 trillion in June 2013, about 80% higher than in mid-2007 (as indicated by the yellow area in Graph C, left-hand panel).

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