Hyman Minsky, image credit PontificadorThe top central banker in China rings the alarm bell, but not only China, maybe the global economy is about to have a nasty moment.Memories are short, during a boom, people forget about the hard times, they fall into the trap of expecting things to last, and just at that moment of optimal excitement, things go bad – often very bad. And there is one thing that these booms have in common, those who ride them with the most confidence are the ones with the shortest memories.
Maybe it is the problem with youth, the millennials seem to form this incredible generation of hard working, entrepreneurially minded, collaborators. With them in the vanguard, with start-ups set to disrupt established businesses like never before, the future seems exciting – at least that is one point of view.
But maybe it is human nature, we find it so hard to learn lessons from history. It is hard enough to learn lessons from our own past, much harder when we read about it, or hear about it from our parents.
And that, in a nutshell, is the danger. Stock markets are booming everywhere, in the US, UK, mainland Europe, we see stocks see new highs with such regulatory it has become boring.
“What was in the news today?”
“Oh, the Dow hit its highest reading ever.”
“Yes, but was there any news?”
But if you have been around long enough, you know that triumph can turn to despair in hardly any time at all. It happened in 1987, it happened in the year 2000, it happened in 2008 – it is not even unusual. Boom turned to bust. Before the 2008 crash, Gordon Brown promised to put an end to boom and bust. Before the 2000 crash, we were told dotcoms were on an unstoppable rise to greatness. In 1987, an advertising agency (Saatchi and Saatchi) tried to buy a bank (Midland Bank).
Hyman Minsky was an obscure economist, known for his crumpled suits, who died back in 1996. But he developed a theory that was spotted and became famous years after this death. He described an economic cycle in terms of debt. To begin with, debt is fine, and payments can be paid-off from income. Then it rises, and income is only enough to pay back the interest on debt. Then it rises further still, and people and companies have to borrow in order to fund repayment of existing debt. And this reaches a point when it is no longer sustainable; we see a mighty crash, this has become known as the Minsky Moment.
It is argued we saw a Minsky moment in 2008, and maybe in 1929.
Yesterday, Zhou Xiaochuan, governor of China’s central bank, warned that China was in danger of experiencing its own Minsky moment. He said: “When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified. If we’re too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a Minsky Moment. That’s what we should particularly defend against.”
So that’s China, what has that got to do with over here?
Well it has two things. For one, these days, what with China being the second biggest economy in the world, what happens over there, beyond the Great Wall, affects the rest of the world.
For another thing, right now, there are similarities between what is going on in China and what is going on in the West?
So, should we be worried?
Actually, not wishing to pour cold water on the claims of the cynics, there are reasons to think things are not so bad.
Looking at China, it needs to be borne in mind that while debt is high, so are savings. China is not in debt to the rest of the world, it is in debt to itself. Mr Zhou was speaking as part of the 19th National Congress of the Communist Party of China. The same congress where Xi Jinping, China’s President, consolidated his position, becoming the most powerful leader in China since Mao. The question is, can a country under such firm rule from one man, see a true Minsky moment, when actually, for the economy as a whole, debt is not so high. Maybe it can, corporate and local government debt is truly excessive, house prices in some areas look absurd, but China is complex – one day its economy will experience recession, whether that will happen soon is more guess then anything.
As for the West, it is true that stocks have been surging. But the increases in equity values are nothing like the exuberance seen before most of the big stock market crashes in the past. The S&P 500 – the stock market that tracks the top 500 companies in the US – has doubled over the last five years. But in the three years before the 2000 crash, it trebled in value, the NASDAQ, which was the market that saw the biggest losses in 2000, saw a seven-fold increase before it crashed.
Sure, private sector debts are high in the West, but as a percentage of GDP, lower than in 2008 – quite a lot lower.
In the build-up to the 2000 crash, we were sold the narrative that technology was set to change the world. It did not live up to the hype, so we saw a crash. But actually, if you pull back, we find that the tech of that time did live up to its hype – it just took longer than was expected.
What about now? The technological changes that are afoot make the dotcom advances of the late 1990s seem mild. If technology really is accelerating, as many think, if we are at that point on the exponential curve that describes technological progress when it gets steep, the changes wrought by technology are set to occur very rapidly.
Maybe the problem is not the 'bright young things', who cannot accept the repetition of history, it is the older folks, the cynics who can’t accept that in an era of accelerating technology, hype can become reality in hardly any time. Maybe, when we are in the midst of the greatest industrial revolution ever, and it is okay if debt surges, providing that debt makes the revolution possible – a Minsky Moment may never happen.
