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Opinion from a Libertarian ViewPoint

The Covid Panic Brought Even More Economic Zombification | Mises Wire

Posted by M. C. on February 17, 2022

More and more economists and finance specialists are warning of the potential arrival of a new “Minsky moment.” The last time this term was used with such conviction was in 2008 at the onset of the Great Recession. It seems that 2021–22 could have some parallels with the world’s last severe recession.

https://mises.org/wire/covid-panic-brought-even-more-economic-zombification

Daniel Fernández Méndez

The Twenty-First Century: The Century of Debt

Up to now, the twenty-first century could be called the century of debt, and if things continue the way they are, it could well be called the century of the great debt default. At the beginning of the century, the extremely low interest rates promoted by central banks in practically the entire developed world caused a frenzy of private credit creation and a gigantic financial and real estate bubble that exploded in 2008 with dire consequences for the world economy.

Central banks, heavily pressured by politicians, redoubled their commitment to low interest rates, causing public overindebtedness to a degree unprecedented in times of peace. In 2020, when the growth model based on the accumulation of public debt and low interest rates seemed to start to weaken, the COVID-19 recession arrived. The worldwide excess of public spending in 2020 has not been corrected, and it does not appear it will be corrected any time soon. The new public debt is adding fuel to the fire. And the accumulation of it (and also private debt, especially that issued by companies) could be reaching the point of no return.

Global debt reached $200 trillion at the beginning of 2011, while global [gross domestic product] GDP was $74 trillion (275 percent debt/GDP). In the second quarter of 2021, global debt reached almost $300 trillion with GDP of $83.9 trillion (330 percent debt/GDP).

Figure 1: Global debt and global GDP

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What Is a Minsky Moment?

Hyman Minsky was a post-Keynesian economist who developed a very insightful taxonomy of financial relationships. According to him, the finances of a capitalist economy can be summarized in terms of exchanges of present money for future money.1 The relationship proposed by Minsky is as follows:

  1. Present money is invested in companies that will generate money in the future.
  2. When companies make a profit, they return the money to investors from their profits.

Income or profit expectations determine the following:

  1. The flow of present money to companies
  2. The price of financial assets such as bonds and stocks (financial assets that articulate the exchange of present money for future money)

Present business income, meanwhile, determines the following:

  1. Whether expectations about past income (included in already-issued financial assets) have been met
  2. How to modify expectations about future income (and therefore, indirectly, the flow of present money to companies and the price of financial assets issued in the present)

Minsky articulates three possible types of income-debt relationship in companies (although he extends the analysis to all economic agents):

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