Keynes on the unfolding financial crash

Current predictions of the doom of financial assets are too numerous to quote, and numerous enough for anyone to find at least ten on a cursory surfing of the internet.

The history of financial cycles is as long as history itself, but we are coming up against the conditions for – in capitalist historical terms – a major one with a terminal end. Cycles/crashes have been part of complex webs of economic movement since the end of the Napoleonic wars, but since the end of WWII we have an entirely new dynamic arising out of the ashes of a cataclysmic experience of “slash and burn”.

We are coming up against the conditions thus for a terminal end to the period since the crisis of the 1970s and the resolution which has defined the period to 2008 – one therefore which will demand major social change – because only if the US can turn the government budget situation round dramatically can it build up the fire power it needs to keep the system going in the face of its lack of “fiscal autonomy” caused by accumulated deficits and large foreign holdings by foreigners. A “crash” has in fact already taken place in stages between 1998 and 2008, and it is principally the Fed that has come to the rescue to prop up the system by offering the refinancing for what Minsky calls the “Ponzi units” in the financial system, not allowing these units to go bankrupt in what would otherwise be a natural course of events. To understand why “big government” is ironically essential for the survival of financial “markets”, and why “expert” monetary and financial management inevitably involves the kicking of the can down the road in the form the refinancing of “Ponzi units” read: H. Minsky, The financial instability hypothesis: a clarification, in The Risk of Economic Crisis, (ed.) Martin Feldstein, Chicago; University of Chicago Press (1991), pp. 158-166

Furthermore, the insistence on propping the system up is causing massive skewing in the real economy, which we will be paying for in any number of ways over the next fifty years, from the propulsion forward of loss-makers like Amazon that destroy healthy small businesses everywhere, to encouraging irrational energy extraction like fracking, with its continuous and growing deficits, both par excellence examples of “Ponzi units”.  Thus ultimately the success of “big government” in floating the system against all odds, itself begins to undermine its crucial “fiscal autonomy”. As Keynes said in the General Theory:

“… Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation. This is another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator. Speculators do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation“.

See John Maynard Keynes, The General Theory of Employment, Interest and Money, Macmillan & Co (1936), p. 159 [emphasis added]

Japan has, par excellence, represented the economy which – coming most spectacularly out of the “slash and burn” of WWII – has, since the 1980s, ceased to function, with a government which has buried its head in the sand by trying to prop up an untenable system. It is at the leading edge of the “terminal end” of our current system, with the last hurrah of the sheer insanity and desperation of what has come to be called the Abenomics of Japan’s Prime Minister since 2012, Shinzō Abe. Look out for a future post on this subject.