Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

When is the Second Great Depression coming?

This spring   0 votes - 0 %
By the end of this year   4 votes - 21 %
Next year   3 votes - 15 %
In 2009   2 votes - 10 %
In 2010   0 votes - 0 %
By 2015   2 votes - 10 %
By 2020   1 vote - 5 %
This depression won't be great   6 votes - 31 %
There won't be other great depressions   1 vote - 5 %
Markets will keep going up   0 votes - 0 %
19 Total Votes
I know, the opening sentence is terrible. But perhaps appropriately so.

Crossposted at Booman Tribune as well.

When is the best time to put it at Daily Kos?

by das monde on Tue Mar 20th, 2007 at 07:46:00 AM EST
Now crossposted at Daily Kos as well.
by das monde on Wed Mar 21st, 2007 at 07:06:28 AM EST
[ Parent ]
Looks like you fell down the queue though.  Sorry.  

(My OTHER gripe about D.kos:  It is time for him to redisign the software to adapt to the huge size.)  

I thought it was a good thread though, if small.  

Interesting that folk there thought the crash will come sooner ('09) than here ('15)0--though it is bimodal.  

The Fates are kind.

by Gaianne on Thu Mar 22nd, 2007 at 01:48:09 AM EST
[ Parent ]
Minsky's theory is "most applicable to a closed economy". Some bubles might have to collapse by now already, but the process of globalization spreads markets and the pool of outsiders entering them. Hence, the bubbles may keep growing. The recent stock market "corrections" are good indications of this process: the Shanghai dip of 3 weeks ago was provoked by rumours that Chinese government may try to curb market speculations more seriously.

The global economy is a closed economy, by definition.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 20th, 2007 at 07:51:22 AM EST
Minsky seems to follow a long line of thinkers who find capitalism inherently unstable.  Of course, "it's just the normal business cycle", right?
by andrethegiant on Tue Mar 20th, 2007 at 10:14:20 AM EST
I'm not sure economic cycles have anything intrinsic to do with capitalism. All you need is delayed feedback to produce boom-bust behaviour.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Mar 20th, 2007 at 10:19:33 AM EST
[ Parent ]
I was looking at Kondratiev waves


and wondering to what extent we are seeing credit financing the creation of new waves of technology to give the upswing followed by periods of repayment of the debt (and hence monetary contraction in a deficit-based monetary system) from the revenues from the new generation of productive assets, on the downswing.

So cycles - bounded by the mathematics of compound interest on the money supply - would be intrinsic to our current - deficit-based - form of Capitalism.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 20th, 2007 at 11:22:12 AM EST
[ Parent ]
I am saying I don't believe the cycles would go away if you removed debt, because of the delayed feedback involved in the economic system in any event.

As to the severity and character of the cycles, sure.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 20th, 2007 at 11:28:05 AM EST
[ Parent ]
Capitalism seems to "thrive" on instabilities. Libertarians just do not accept any damping measures. They hail GDP growth as the holy grail. As for crisises - well, they are swift but rare and short.

In particular, experienced stock traders are surely aware of Ponzi modes in one way or other. Taking benefit from that must be a usual buisiness for them. Predicting moods of new market players is even an easier task than estimating "intrinsic" value of companies. (This is akin to the job of bookmakers: they do not really predict sport events; they just have to predict moods of participating betters. If they force bets to be distributed evenly, bookmakers win their daily bread with any outcome of the sport event.)

by das monde on Tue Mar 20th, 2007 at 08:57:17 PM EST
[ Parent ]
Bookmakers don't need to force bets to be distributed evenly: they just need to continually adjust the odds to respond to the changing mood of the bettors.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Mar 21st, 2007 at 02:25:18 AM EST
[ Parent ]
If I look at the crisisses I know, the Ponzi element can be clearly distinguished. The Russian crisis had a clear Ponzi scheme with GKO bonds running. The Asian crisis embraced attractive interest rates, high inflow of money and rocketing asset prices.

Japanese real estate crisis was fuelled by the saving policies of the postwar years. This does not look much like a Ponzi scheme, but the role of relaxed money supply (and exploding asset demand) is clearly visible.

The Great Depression came clearly from a speculative boom. Automobiles and radio were the expanding new technologies. Easy credit was stimulated. Americans were encouraged to borrow and spend. Surely, there must have been a runaway Ponzi element somewhere.

The Bush admistration is on the same path. Maybe they genuily think they can avoid critical mistakes and repeat a guilded age boom in "a right way". Or maybe "they" cynically see an opportunity to enrich an insider ring with a hidden global Ponzi machine most effectively.

It seems to me that whenever you run up a sure Ponzi scheme on the scale of a whole market, you must hit a crisis regardless of the phase of the economic cycle. Since Ponzi schemes are very unstable, consequences must be evident within a few years.

What is the sense of Kondratiev type macrocycles within this framework? I see two possible features.

For once, a prosperous phase might increase money supply greatly. This does not automatically induce a Ponzi trading, but the potential is there to be crystalized. Once the public is overexited, or the government relaxes control for maximal bang, Ponzi snowballs start rolling.

Secondly, the whole economy might contain a very weak Ponzi element. Most of the time, the Ponzi element is undetectable. But it does gain substance within decades, and then boom-busts in a few years.

by das monde on Tue Mar 20th, 2007 at 09:59:09 PM EST
[ Parent ]
Scenerio I:  

Bush and his wealthy backers are greed-crazed idiots.  They don't even know what they are doing.  It is like a drug binge, where even if you can remember that last time you ended in a dreadful crash, right now it feels just too good to be thinking about that.  

This scenerio is almost comforting.  

Scenerio II:  

Bush's backers have been running the US for the better part of a century, and not by being dumb, either--even if HE is.  They know they are running a bubble, and they already know when to cash out.  Will it destroy the system?  Sure.  But Peak Oil and climate change are on the verge of doing that anyway, so what's the problem?  The problem is what comes after.  Well, they are not talking about that, but they have certainly been THINKING  about that.  

They already have plans.  

This scenerio is less comforting.  

The Fates are kind.

by Gaianne on Tue Mar 20th, 2007 at 11:45:31 PM EST
[ Parent ]
Albania in 1997 was a wake-up for me:

Many citizens naive to the workings of a market economy put their entire savings into pyramid schemes. In a short while, $2 billion (80% of the country's GDP) had been moved into the hands of just a few pyramid scheme owners, causing severe economic troubles and civic unrest. Police stations and military bases were looted of millions of Kalashnikovs and other weapons. Anarchy prevailed,[4] and militia and even less-organized armed citizens controlled many cities.

Thus described by wikipedia.

I remember reading an in-depth article at the time. According to it (and my memory) it was not a strict pyramid scheme, but rather a bubble turned Ponzi. The bubble started from political changes in the area, that is the wars in what was soon to be former Yugoslavia and the sanctions put in place.

Albanian groups started to smuggle sanctioned stuff and made lots of money. Their was room for expansion and more and more people invested and got rich. The Dayton agreement of 1995 removed the foundation for the investment scheme but by then the speed was great enough that it could carry on until 1997 on pure momentum. But the day came when all savings had been sucked up and then the ineviteble collapse.

This was refered to as a pyramid scheme by western media and that got me thinking about the raising stocks at the time (1997) when everyone was becoming an investor and especially in technological stocks. So I figured that that must be a bubble too and predicted a crash in 1998. Apparently I underestimated how big bubbles can be.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Mar 22nd, 2007 at 11:15:32 AM EST
[ Parent ]
Capitalism has a "natural business cycle" because it is based on the same binge-and-crash structure as drug addiction.  

The Fates are kind.
by Gaianne on Wed Mar 21st, 2007 at 02:06:57 AM EST
[ Parent ]
Economies have a natural business cycle because of delayed feedback.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Mar 21st, 2007 at 02:29:05 AM EST
[ Parent ]
Also, incomplete.  

(Umm.  Oh, yes:  Drug binges have delayed feedback, too.)  

The driving force is undamped POSITIVE feedback.  

If the 19th century was learning about the destabilizing effect of positive feed back, the 20th was about how external (political) attempts to apply appropriate negative feed back can be successful, but are readily subverted.  

So that the system, as a whole, is again unstable.  

Living systems seem to deal with this problem by increasing their complexity, and the extra layers of feedback yield increased resiliency.  

Capitalist political economies move the opposite way--toward simplified structures.  Capitalism does to the human environment what it does to the physical environment--desertifies it.  

The Fates are kind.

by Gaianne on Wed Mar 21st, 2007 at 03:47:39 AM EST
[ Parent ]
Okay, let's say that the economic system is unstable [positive feedback by definition] against growth of new modes of economic activity and that delayed feedback and imperfect information lead to overshoot and collapse oscillations of the size of economic sectors instead of logistic growth/contraction.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Mar 21st, 2007 at 06:02:08 AM EST
[ Parent ]
Just for the fun of it, I googled "Veblen Minsky" together.

Title: A Veblenian View of Minsky's Financial Crisis Theory
Author(s): Patrick R. Kelso, Barry L. Duman
Journal: International Journal of Social Economics
Year: 1992 Volume: 19 Number: 10

Abstract: Compares and contrasts the views of Hyman P. Minsky and Thorstein Veblen concerning the systematic development of financial crises in capitalistic economies. Advances the argument that Minsky and Veblen have both successfully met the challenge of providing a reasonable explanation for the speculative mania and related excesses critical to any theory of cyclical fluctuations. They agree that upturns tend to euphoria and ultimately, over-capitalization and subsequent economic decline. Their rationales differ. Veblen stresses the effects of rising prices on collateral values and argues that the cumulative effect is over valued assets. Minsky seems to emphasize the ever-growing fragility of financial structures. In the view of the authors, this article places Veblen′s contributions in a contemporary setting and ties Minsky more closely to the institutionalists.

Echoes of Veblen's theory of business enterprise in the later development of macroeconomics: Fisher's debt-deflation theory of great depressions and the financial instability theories of Minsky and Tobin

Authors: Robert W. Dimand

Abstract: Irving Fisher's debt-deflation theory of great depressions, first published in 1932 and 1933, was invoked by Hyman Minsky and James Tobin as a crucial precursor of their theories of macroeconomic financial instability. This paper argues that Wesley Mitchell was right to perceive a close intellectual affinity between Fisher's debt-deflation theory and Thorstein Veblen's Theory of Business Enterprise (1904), and that this affinity also exists between Veblen (1904) and the analyses of Minsky and Tobin.

Minsky's Analysis of Financial Capitalism

Authors: Dimitri B. Papadimitriou, L. Randall Wray

Abstract: In this paper, the authors discuss Minsky's analysis of the evolution of one variety of capitalism-financial capitalism-which developed at the end of the nineteenth century and was the dominant form of capitalism in the developed countries after World War II. Minsky's approach, like those of Schumpeter and Veblen, emphasized the importance of market power in this stage of capitalism. According to Minksy, modern capitalism requires expensive and long-lived capital assets, which, in turn, necessitate financing of positions in these assets as well as market power in order to gain access to financial markets. It is the relation between finance and investment that creates instability in the modern capitalist economy. Financial capitalism emerged from World War II with an array of new institutions that made it stronger than ever before. As the economy evolved, it moved from this more successful form of financial capitalism to the fragile form of capitalism that exists today.

[People] have conditions today that resemble those of nearly a century ago that evoked Thorstein Veblen's (1904) observation that capitalism encouraged the pursuit of pecuniary gain at the expense of social provisioning. Not only do corporate managers attempt to please security holders by encouraging regulators to relax environmental standards and by increasing their market power, their ruthless expense cutting has, as described by Minsky and Charles Whalen (1996-97), increased economic insecurity and inequality for most working families.
by das monde on Wed Mar 21st, 2007 at 06:43:25 AM EST
Can I get you to cross-post this?  It makes a wonderful counterpoint with Techno's Veblen piece, which was also cross-posted.

The Crolian Progressive: as great an adventure as ever I heard of...
by Nonpartisan on Thu Mar 22nd, 2007 at 07:30:30 AM EST
It seems that the most widespread technical term for the (yet "mysterious") processes that preclude financial crisises is overheating. For example, there is much concern at the moment about overheating in the Baltic markets. Here is a global news report:
Is Latvia's economy following in Iceland's overheated footsteps?

WARSAW: Latvia is giving some emerging market investors a sense of déjà vu.

A year ago the economy of tiny Iceland went into a skid. It was a wake-up call for traders who chased high yields around the globe with little regard to economic risks.

Now, another small, red-hot economy in Europe's cold north is in the spotlight, and markets are taking a hard look at its peers for signs of trouble brewing elsewhere.

The verdict is that many show similar worrying symptoms -- an unsustainable pace of growth fueled by booming consumption and credit, high foreign debt, surging wages, current account deficits topping 10 percent of gross domestic product and low currency reserves.

[Danske Bank] analyzed 11 "vulnerability indicators" for the 10 European Union members from Eastern Europe, putting Latvia and its neighbors Estonia and Lithuania, as well as Romania and Bulgaria, in the red danger zone.

The booming Slovak economy got a yellow warning light.

The process is admittedly enigmatic, but they have vulnerability indicators. Just do a Google search on "overheating vulnerability indicators", and you will get many PDF articles returned on the stuff.

How much common or different is between these three terms?

  1. Overheating
  2. Financial bubble
  3. Minsky's Ponzi financing

Is "overheating" just a less scary euphemism for the same thing? Are we having a global financial warming?!
by das monde on Fri Mar 23rd, 2007 at 02:16:40 AM EST
Here are a couple of links from IMF:
The Challenges of Predicting Economic Crises
The Asian Crisis: Causes and Cures

Even with most official terminology, prediction of financial crises looks very much like fortune telling, as evidenced by this abstract:

This paper examines the view that the recent Indonesian crisis was largely unforeseen. The broadest macroeconomic indicators were of virtually no help in presaging the crisis; neither were high-frequency financial indicators. But warnings were there, just below the surface, in some of the macro indicators and in certain structural weaknesses that were long recognised as threats to financial stability. That said, none of these warnings suggested crisis of the magnitude that eventually occurred. The Indonesian experience indicates that macroeconomic stability should never be taken for granted. Signs of vulnerability to financial instability include: the degree of reliance on gross private capital inflows (taking into account maturities and the implications for rollovers); the extent of unhedged foreign exchange positions; and certain indirect indicators, such as policy slippages and key personnel changes. Finally, in a world of volatile capital flows, crisis will tend to occur before standard economic data suggest that crisis is imminent.

Hmmm... Reliance on gross capital inflows...

by das monde on Fri Mar 23rd, 2007 at 02:18:57 AM EST
Sorry, the above post was supposed to be a reply to my own "Overheating" comment above.

I tried to google "overheating Minsky" together, but unambiguous relations are rare. It's a bit surprising that people interested in the same problem do not find each other's ideas easily.

One article cites an anonymous Waal Street economist:

what's going wrong is that economy is doing better than anyone expected it to do.

I think that many pyramid players had the same moment about their game. Sure, I immediately can raise a few obvious disclaimers, but...

Other NY analyst can say this:

When asset prices rise, it reflects a change in the money supply/asset relationship, meaning more money chasing the same number of assets. Thus when asset prices rise, it is not necessarily a healthy sign for the economy. It reflects a troublesome condition in which additional money is not creating correspondingly more assets. It is a fundamental self-deception for economists to view asset-price appreciation as economic growth. A housing bubble is an example of this.
by das monde on Fri Mar 23rd, 2007 at 02:35:42 AM EST
[ Parent ]

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