[OPE-L:2003] Re: Re: Re: Re: Re: Value Form (1972)

From: Steve Keen (s.keen@uws.edu.au)
Date: Sat Jan 01 2000 - 19:34:02 EST

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As a proponent of Fisher's "debt deflation theory of great depressions"
Minsky's "Financial Instability Hypothesis", I see the current Wall
Street/Nasdaq situation as a classic "euphoric" phase of the business
cycle. Minsky argues that there is an endogenous cycle which leads from a
debt-induced crisis, to (normally) recovery, to rising expectations as the
memory of the previous collapse recedes, to a euphoric stage of asset
speculation, to a bust when the asset market is flooded by asset holders
wishing to capitalise their gains to finance increased interest rate burdens.

The cycle can turn into a collapse if there is low inflation and no
counteracting expenditure by government. We have the former, but inevitably
government spending will rise, even given the austere present-day attitudes
towards the welfare state.

The odds are that, when this bubble bursts, it will be the biggest crash in
history--far dwarfing 1929 and 1987.

For a start, the level of overvaluation is unprecedented (in the
USA--though the same occurred in Japan in 1983-89). The long-run average
price to earnings ratio is 14; the Dow average is now about 35, S&P
similar, while the Nasdaq is roughly 150 to one.

These valuations are only justified if capitalism is about to enter a "new
era" with growth averaging 200.a. for the next three decades. I don't
think I need to discuss that scenario on this list!

The main worry though, which convinces me that this will be more than the
temporary glitch of 1987/89, is the level of private debt in the USA.
Private (non-government) debt is now about 1500f GDP; according to
Fisher, total debt in 1929 was roughly 60%. So even if the government
provides the kind of counter-cyclical boost to cash flows which Minsky
discussed, the scale of the private imbalance is so enormous that I expect
it will overwhelm government cash flows for at least a decade--as it has
done in Japan.

The actual downturn may have to wait until all those baby boomers realise
that, gee whiz, Amazon probably will never make a profit... And the
valuations of all these bubble stocks will come down to earth, bringing
down baby boomer wealth with it--and plunging quite a few into bankruptcy.

God knows what the catalyst will be though, or when it will strike. I stuck
my neck out in 1997, guessing that the breakdown had begun. In a strict
technical sense, I was right--stock watchers argue that October 1997 was a
broad market peak, and that--especially since August 1998--the broad market
has been in decline. Only the value-weighted indices have disguised a
general bear market (see http://www.cross-currents.net/charts.htm for a
very good coverage of this).

After Y2K appears to have been a non-event, there may well be another wave
of euphoria that carries the market on through the normally up months until
we once again strike October. If the sea of red ink across the internet
sector sufficiently scares the market, then that could be the start of the
first great depression of the 21st century. But ... who can pick when a
mania will subside?

When it does though, I expect that the Nasdaq's plunge will be truly
historic, to answer your last question. The NYSE has a number of technical
mechanisms which limit the rate of decline--market makers, trading halts on
serious stock falls (2 1/2 and 5 per cent falls respectively trigger a
half-hour and day closing of the exchange). The Nasdqa has none of these,
and with on-line trading dominating its action, I expect that the panic
will overwhelm their hardware and lead to the greatest valuation declines
of all time.

But as to when? I've given up trying to pick the American psyche on that one!

As for other post-keynesians, the answer is a mixed bag. A lot of them are
getting off on this notion of an "employer of last resort", and largely
ignoring the stock exchange, or arguing that the Federal Reserve will flood
the place with liquidity and overcome the problem. However others are
talking of such things as "seven unsustainable processes"--a Jerome Levy
publication--which they expect will lead to a Japan-style crisis in the US.

Got to go--packing the bags for a short summer holiday!


05:34 2000-01-01 -0500, you wrote:
>Re Steve K's [OPE-L:1999]:
>> I didn't want to see a serious Y2K effect, since if one occurred then
>> in eons hence, revisionist economists would blame the approaching
>> Wall Street meltdown on the Y2K bug, and not the market's inherent
>> instability.
>Yes, the Wall St. market is inherently unstable. All markets are
>inherently unstable. Risk, uncertainty, and instability are all
>necessary aspects of the commodity-form.
>Thus, you haven't really told us (yet) why you think that there is
>an "approaching Wall Street meltdown". What, more specifically,
>are its causes?
>What it be too much to infer from your suggestion that economists
>"eons hence" will be discussing this "meltdown", that the
>"meltdown" will be of a scale not seen by stock crashes in our
>btw, what are other Post-Keynesians saying now about this topic?
>In solidarity, Jerry
Dr. Steve Keen
Senior Lecturer
Economics & Finance
University of Western Sydney Macarthur
Building 11 Room 30,
Goldsmith Avenue, Campbelltown
PO Box 555 Campbelltown NSW 2560
s.keen@uws.edu.au 61 2 4620-3016 Fax 61 2 4626-6683
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Home Page: http://bus.macarthur.uws.edu.au/steve-keen/
Workshop on Economic Dynamcs: http://bus.macarthur.uws.edu.au/WED

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