Minsky Theory and Disruptive Innovations in Technologies: A Global Perspective
This chart well summarizes the Minsk theory or cycle. The way an economy deals with its revenues (GDP) and its debt (credit) can explain a major financial crisis occurrence… To avoid the occurrence of a financial crisis, revenues (GDP) growth should be equal or superior to the debt (credit) one.
When the revenues growth is superior or equal to the debt one, you have the model of the hedge financing economy. The reversal leads to the speculative and Ponzi financing economy models that are at high risk of collapsing in the financial crisis.
My thesis is that sustainable, efficient and massive implementation of disruptive innovations in technologies can either maintain a healthy growth of the hedge financing economy or reverse speculative or Ponzi financing ones to the hedge financing economy.
Both the industrial revolution from Europe, North America to Japan and the reforms of the Chinese economy from 1978 to nowadays are the strong evidence that supports my thesis… However I will focus on general aspects of this thesis with the illustration of government fiscal stimulation…
The synopsis about Minsky theory within The Economist is well done… I will try a tentative generalization of the Minsky theory to better summarize the frame that can help to understand the current situation of the global economy.
An investment is an exchange of money today for money tomorrow. Companies, households and governments invest money today to produce goods and services that they trade or provide for free consumption… Activities from investments, trade and consumption generate revenues… The revenues over years cover the cost of investments and generate profits… It is the accumulation of profits year per year that generates growth. The way an economy funds its activity of investment, of trade, of supply of the public service and of the consumption is the key about its health and exposure to the risk of financial crisis…
Minsky makes a distinction between 3 schemes of financing an economy:
- The first one is the “hedge financing” scheme: future cashflows of companies, households and government are used to repay all their borrowings. In the hedge financing economy, the financial markets and the banking system don’t neither expend excessive borrowings nor spread speculation bubbles in overpricing financial assets… The economy generates healthy profits from the real economy that are translated into healthy growth.
- The second is the riskier speculative financing scheme: economic agents (firms, households, government) rely on their cashflows to repay the interests on their borrowings but must roll over their debts to repay the principals. This should be manageable as long as the economy functions smoothly, but a downturn could cause distress.
- The third scheme is the dangerous Ponzi financing: Cashflows cover neither principals nor interests; economic agents are betting only that their underlying assets will appreciate by enough to cover their liabilities. If that fails to happen, they will be left exposed. In the Ponzi scheme economy, financial markets fuel bubbles in overpricing assets, which bubbles increase the systemic risk…
As The Economist notices, ‘’economies dominated by hedge financing — that is, those with strong cashflows and low debt levels — are the most stable. When speculative and, especially, Ponzi financing come to the fore, financial systems are more vulnerable. If asset values start to fall, either because of monetary tightening or some external shock, the most overstretched firms will be forced to sell their positions. This further undermines asset values, causing pain for even more firms. They could avoid this trouble by restricting themselves to hedge financing.’’
The reason why many monetary and fiscal stimuluses from governments don’t work is because they fuel the Ponzi scheme economy instead of reversing the situation into the hedge financing one… If a government wants to reverse the situation from a speculative economy to the hedge financing one, they should redirect the allocation of resources within the real economy to promote the investment in capital of businesses and projects that can generate or induce revenues and income… The question is now which kind of projects can reverse the trend from a Ponzi scheme economy to the hedge financing one?
Most of governments often prioritize infrastructure projects. That’s good… An infrastructure is like a house… It can generate direct revenues if it is a commercial one… If it is not a commercial asset, its value comes from indirect revenues that it can induce from the owner household income… A residential house is worth of the income that the owner household produces beyond its value on the market… So when a government invests in public infrastructure projects; if the activities within the real economy using those infrastructure assets don’t generate enough revenues to pay taxes in the middle and long terms and to support the costs of having those assets; you get white elephants that worsen the Ponzi scheme economy… This is the case of many mature economies…
An efficient solution is about investing in disruptive innovations within the real economy from infrastructure to the industrial production of goods and services to generate or induce enough revenues with healthy profits… 3D printing technologies, hydrogen fuels and engines, artificial intelligence (if it is better framed), etc. are among very disruptive technologies that need huge investments with the capacity of industrialisation or re-industrialization for healthy revenues and profits…
Let put things in the global perspective: China and Russia have industrial overcapacity with high supply of disruptive technologies; Europe, Japan and North America have nowadays cheap money because of historic low interests while experiencing pressure from declining demographics; Africa, India and Latin America have huge needs for industrialization with pressures from their growing demographics…
An efficient solution of the equation is very clear at the global scale: Europe, Japan and North America can fund the industrialization of Africa, India and Latin America with Chinese and Russian cheap and disruptive technologies… Europe, Japan and North America will get revenues to reverse the trend of their current Ponzi scheme economy; China and Russia will get revenues to manage the transition of their economy; Africa, India and Latin America will fund their industrialization… It is a win win win deal!
However, there are preconditions to make this a success: working as equal partners and ending the legacy of slavery and lynching that makes Africa and Africans the losers of the game… If such preconditions cannot be met; China and Africa should work closely in promoting a new partnership for the industrialization of Africa without interference of any 3rd party… China can fund directly the transfer of its technologies for the industrialization of Africa with mutual benefits without any external funding… It is easily feasible if African countries in their majority adopt effective national leadership and political systems focused on economic development and social transformation of their nations.
By the way, is the world today better immune against the occurrence of another financial Tsunami? The answer is of course a BIG NO! Why? The answer is not necessarily because of «Too Big to fall (or fail!)»! The reason why the exposure to systemic risk is still high in the global economy is because of the structural weaknesses of many economies where the revenues from the real economy are not the engine of their growth…
Today it is more difficult for startups and businesses operating in the real economy to get capital for funding their investments and operations that can generate revenues… The systemic risk increases when the essential of both the monetary perfusion from central banks and the budgetary one from governments fuels speculative and Ponzi schemes instead of supporting innovations in technologies of startups and businesses of the real economy that can produce revenues of an edge financing economy…
Theoretically and empirically, the prescription against systemic risk is about reducing the systemic entropy of the economy… The best cure against such entropy is more diversification of the edge financing; not more uniformisation of speculative and Ponzi schemes!
Diversification doesn’t mean necessarily absence of organization… And uniformisation doesn’t necessarily mean organization… You can get either organization or absence of organization in both diversification and uniformisation… However diversification is the most efficient way to contain the spread of systemic risk that ends up in entropy…
Diversification is the cure against entropy; not the cause of entropy! Now, this said, you will never get a diversified system when special interests drive the government decisions in increasing the fuelling of either a monolithic or a cosmetic oligarchy based on speculative and Ponzi schemes instead of supporting equally and without any discrimination entrepreneurs who can develop the edge financing of the real economy..
