Can We Avoid Another Financial Crisis? (The Future of Capitalism)

by Steve Keen

A period of tranquil growth thus leads to rising expectations, and a tendency to increase leverage: as Minsky put it in his most famous sentence, ‘Stability – or tranquility – in a world with a cyclical past and capitalist financial institutions is destabilizing’ (1978, p. 10).

The American philanthropist Richard Vague identified a significant empirical regularity that every economic crisis over the last 150 years has manifested: the combination of a private debt to GDP ratio of 150 per cent or more, and an increase in that ratio over a fiveyear period of 17 per cent or more (Vague, 2014).

But the peculiar dynamics of debt mean that casual observation supports the proposition that a politician who either triggers or benefits from a debt bubble is a good economic manager – capable of delivering good times and also running a government surplus – while the politician who wears the aftermath of the bubble stands accused of being an economic incompetent who presides over a serious recession and runs a government deficit.

The only way to counter this is to make the private debt to GDP ratio as significant an entity in economic management as the inflation and unemployment rates are today, and to employ the State’s capacity to create money as a tool of macro-economic management specifically to reduce private debt when it starts to rise to a dangerous level – which is well under 100 per cent of GDP, and far below the levels that unbridled finance has saddled us with today.