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Minsky, “bubbles”, and gold

Sep. 14, 2009 10:20 AM ET6 Comments
Jeff Nielson profile picture
Jeff Nielson's Blog
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As I routinely reject the fraudulent “statistics” produced by the U.S. government, and the fantasy-predictions made by the legions of U.S. market-pumpers, I refer back again and again to one supremely important factor: debt.

The United States has accumulated more debt and liabilities than any other nation in the history of the world. This is true not only in absolute terms, but also in relative terms (i.e. in relation to the size of its own economy and the global economy). In fact, the debts and liabilities of the U.S. grossly exceed those for all the rest of the world combined: the product of claiming for thirty years that “deficits don't matter.”

One of the bonuses of my own work is that I have been exposed to the fine work being done by many other writers and bloggers. Sometimes I find them through my own research, and sometimes they find me – through reading what I have written. An example of the latter is Steve Keen, and his excellent blog “Debtwatch”.

Mr. Keen, in turn, is a devout fan of famed economist, Hyman Minsky – and approaches his own economic analysis from the perspective which Minsky pioneered. As I wrote to Steve, recently, he couldn't have picked a better “role model” for this particular time, given that the genius of Minsky is only now becoming apparent – as reality matches the theory which he pioneered.

The “centerpiece” of Minsky's work is his theory on “financial instability”. The basis of Minsky's theory is that capitalist financial markets are not only vulnerable to producing excessive debt (especially when stripped of the limiting, protective restraints of a “gold standard”), but that they have a tendency to produce the most-destructive kinds of debt.

He divided up these pools of debt into three categories of borrowers, whom he referred to as “hedge borrowers”, “speculative borrowers”, and “Ponzi borrowers”. Given the manner in which the miscreants of Wall Street have rudely re-introduced us all to the concept of the “Ponzi scheme”, I'm sure that the categories alone to which Minsky refers will pique the interest of many.

Hedge borrowers” (or “safe borrowers”, to use an even clearer label) have current income streams which are sufficient to repay both the interest and the principal of what they have borrowed. “Speculative borrowers” on the other hand, only have current resources/cash flow sufficient to pay the interest on the borrowed money, but will only be capable of repaying the principal of the loan if the loan itself can be successfully used to generate additional income or capital gains.

The third category of borrowers, designated “Ponzi borrowers” (or simply “insane borrowers”) have neither the assets nor cash-flow to even pay the interest on the money they borrow. They rely upon the loan money generating immediate revenues or capital gains, just to be able to service the debt (i.e. pay its interest), while these reckless gamblers would require spectacular gains in order to ever repay the principal of their loans.

Another economist, Paul McCulley, conveniently applied Minsky's three categories of debtors to the U.S. “housing bubble” (and the sub-prime mortgage “Ponzi scheme” perpetrated by Wall Street on the back of that bubble). The “safe borrowers” were those who had conventional mortgages and would have no problem repaying both principal and interest – subject to some catastrophic event, such as the loss of employment or a (costly) health crisis.

The “speculative borrowers” were those who strayed into unconventional, interest-only mortgages and only had sufficient resources to pay the interest on the mortgage. Repayment of the principal of the loan could only be accomplished when (if) the borrower realized a capital gain or other revenue stream on the property purchased. Unless/until that occurred, these borrowers were entirely dependent upon being able to “roll over” (or refinance) this debt to remain solvent. Even a minor financial problem (or a downturn in the housing market) would be sufficient to push them into default.

The third category, the “insane borrowers”, were those who recklessly entered into the most-suicidal mortgages ever devised by the evil minds of bankers: “negative amortization loans” (or the “I-am-going-to-foreclose-on-you-and-take-your-property” loans). With these loans, the initial repayment schedule did not even pay the entire amount of accruing interest. Instead, from “Day 1” of these loans, unpaid interest immediately began to be added to the principal.

These were loans which were designed to fail – unless the borrower could generate profits from the property over a very short time-horizon. Typically, this meant “flipping” the property for a profit. While, in theory, lining up rental income from the property was also a possible means of staying solvent, since you had to be “insane” to enter into such a mortgage, few of these borrowers chose that route.


Those who
did find renters for their property were not content to use that rental income to keep their loan on a quasi-solvent footing. Instead, they would use that income stream to leverage themselves into another negative-amortization loan – multiplying their risk of collapsing into default.

These greed-blinded lemmings believed the malicious lie from Federal Reserve Chairman Ben Bernanke that he and his bankster-buddies had created a “Goldilocks economy” - where markets (most particularly the U.S. housing market) would simply keep going up forever. It was the economic equivalent of a physicist claiming that the Law of Gravity no longer applied. It was never rational, never even theoretically possible.

Essentially, all the banksters had done was to borrow the “economic model” of the U.S. government itself. In the “deficits don't matter” fantasy-world of the U.S. government, the U.S. economy could continue generating robust “economic growth” indefinitely – despite the fact the U.S. economy stopped generating real wealth when it dismantled most of its manufacturing sector.

This ridiculous “theory” of fiscal management was ludicrously simple – or, rather, simplistic. The assertion was that as long as the U.S. government never “wasted” any economic resources by actually repaying any of the vast amounts of money it was borrowing, but instead kept borrowing ever-larger amounts of money on into infinity, that the U.S. economy could be “wealthy” without actually producing any wealth.

This “economic model” also serves as a very workable definition of a “Ponzi scheme” - hence the term “Ponzi scheme economy”, which is being used increasingly by myself and other commentators to describe the United States. The rationale was that because the U.S. economy had not been vaporized by a debt-implosion yet that this proved the validity of this “economic model”.

The often-used analogy is that of a person who jumps off of the roof of a hundred-floor building. As the “economic innovator” plunges past a window on the 50th floor, he is heard to remark, “Things are great, so far.” This has been the foundation of the U.S. economy for roughly thirty years, and more recently, the foundation for the Wall Street crime syndicate during this decade.

Returning to Minsky, what is becoming ever more apparent is that Minsky's theory is not only a very useful tool to observe and understand borrower-behavior, but a compelling indictment of “laissez faire” capitalism.

While I often point an accusing finger at the U.S. for allowing more and more of the total wealth of its economy to be concentrated in fewer and fewer hands, the reality is that this is occurring in all devoutly “capitalist” economies. The liars and apologists who attempt to justify this perpetual pattern of stealing from the poor to give to the rich, point to the obscene pools of wealth being accumulated by capitalist oligarchs as being “supportive” of economic growth – because they supposedly fund the “investment” necessary to generate healthy economic growth in the future.

Minsky's model, which acquires greater and greater credibility with each passing day, utterly refutes this assertion. This becomes clear as soon as we move Minsky's analysis from a “static model” to a “dynamic” one. Minsky, himself, observes that the “insane borrowers” (or “Ponzi borrowers”) are those caught up in “economic euphoria”. In other words, these are people who pile-into a market in the latter stages of a growth cycle. Not only do these people engage in the worst form of borrowing, but they do so at the worst possible time.

The financing which allows this “insane borrowing” is provided from the vast pools of wealth of capitalist oligarchs. It is not even necessary to impute any deliberate intent on the part of these lenders to create what are literally “Ponzi schemes” in markets. Instead, we only need to point out that these lenders get caught up in the same “economic euphoria” (or “irrational exuberance”) as borrowers.

Thus, the huge pools of private wealth which are praised by the economic charlatans who dominate the media as being both “helpful” and “essential” to a healthy economy are never fully-deployed until the worst possible time – where such lending is obviously and unequivocally harmful to the economy.

Conversely, the entire reason why governments have been required to step in with the largest mass-infusion of “liquidity” in the history of our species today is that at the exact time when lending by the capitalist oligarchs would provide the greatest economic benefit to economies, these filthy-rich capitalists cut off all lending to the global economy.

The reality, which has been vividly demonstrated for all the world to see, is that allowing these oligarchs to amass ever more obscene fortunes does not make these capitalist economies “stronger and healthier”. Quite obviously, it does the exact opposite.

The greedy oligarchs flood economies with excessive liquidity at the worst possible time, while starving markets of capital when they need it most. In other words, these increasing pools of wealth guarantee that all the oligarchs will do (now and and in the future) is to produce ever more-extreme “booms” and “busts” in the global economy.

In this respect, we can actually thank Wall Street. A decade ago, this discussion would have been theoretical – and dismissed by the oligarch's propaganda-machine as being merely unproven speculation. However, thanks to Wall Street's multi-trillion Ponzi-scheme, and near-destruction (or imminent destruction?) of the global financial system, this is no longer “theory” but observable fact.

The “case study” of Wall Street provides us with an unmistakable warning: the only thing more dangerous and destructive to the global economy than allowing ever more-concentrated pools of wealth to accumulate is to have such pools of wealth entirely unregulated – as is the case in the United States today (with the derivatives market being but one example).

There are only three possible methods of dealing with this permanent crisis. First, we could institute a set of rigid regulations, vigilantly enforced – which would essentially wrap a legal “straitjacket” around the oligarchs, so that they cannot continue to play their ever more-dangerous “boom/bust” games in the future. On a practical basis, this would not seem to be a very workable solution.

Secondly, we could tax-away the pools of wealth which have been covertly stolen by these oligarchs, and redistribute that wealth in a more even (and much healthier) manner among all members of society – this would make episodes such as the current Wall Street “Ponzi scheme” more difficult to perpetrate. With much smaller pools of “stupid money” which could be diverted into their nefarious schemes, there would simply be much less “gasoline” to pour onto the fire.

From a political standpoint, given that the oligarchs own most of our governments (through their campaign bribes) this would also seem to be an unlikely solution to the current cycle of ever-larger “booms” and “busts”.

The third solution also happens to be the most-popular, most tried-and-true means of achieving financial stability which our species has been able to devise over roughly 5,000 years of recorded history: a gold standard.

A gold standard is a self-regulating means of financial restraint, which is not only the most effective means of controlling financial markets, but also (by far) the most cost-effective – since it does not require armies of bureaucrats/regulators (acting in good faith) to prevent the system from self-destructing.

A gold standard does not absolutely prevent asset-bubbles from forming, indeed no system could achieve such a result unless/until we eradicate greed from the marketplace. What a gold (and/or silver) standard can guarantee is to limit the expansion of credit and debt – the tools used (misused) by bankers to create bubbles.

As I have pointed out in numerous, previous commentaries (most recently with my “Gold Wars” series), this is why gold and silver are seen by the banksters, themselves, as the bane of Wall Street. This is why this cabal of bankers has (for decades) invested vast amounts of time, effort, money, and much of their own hoards of bullion into an effort to suppress the prices of precious metals, and to use their propaganda-machine to attempt to discredit gold and silver as “financial assets” to the greatest extent possible.

Indeed for many people, the mere fact that these bankers hate gold, and hate the thought of a gold-standard even more is the best, possible argument I could make for the wisdom and necessity of reintroducing this form of financial discipline into our global economy.



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