The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Good News = Bad News?

01/05/2010

Hyman Minsky was an economics professor at Washington University in St. Louis. He pointed out the credit availability is cyclical, i.e., that credit will expand until it bursts. In other words, credit doesn’t slowly deflate or get paid down. It bursts! Describing the 1998 financial crisis that began in Russia and ended with the collapse of Long Term Capital Management, Paul McCulley of Pacific Investment Management in California described that bursting as the “Minsky Moment”. Currently, analysts argue whether that Moment for this crash was in June or August of 2007.

Of course, that was in a pre-globalized world. Today, credit to Americans is going down, while credit to America is going up. Neither Presidents, professors, nor economists have any control over the world’s “bond vigilantes”. To sustain an annual deficit of $1.4 trillion, we need to sell a record amount of bonds, but who will buy them? The Chinese have politely said they are starting to get “a little worried”. (Of course, the Fed could buy them all, but the dollar would get crushed.)

Here’s the good news: There is no immediate problem. Estimates are that our debt level, as a percent of GDP, will not catch up to Japan for at least ten years. Here’s the bad news: There is no way to fix a problem, under our method of governing, unless it is an immediate problem.

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