This last part of the series (see Part I, II, and III here, here, and here) will focus on the Brazilian response to the crisis.
1. What Should Brazil Do?
The current Brazilian crisis fits with Minsky’s theory of instability (see here, here, and here). The traditional response to a Minsky crisis involves government deficits to allow the non-government sector to net save. That is, if the private sector desire to net save increases, then fiscal deficits increase to allow it to accumulate net financial assets. The sharp increase in budget deficits in 2015 comes as no surprise. Rezende (2015a) simulated
a scenario in which we have rising government deficits to offset current account deficits, to allow the domestic private sector balance to generate financial surpluses. In this case, in the presence of current account deficits equal to 4% of GDP, to allow the private sector to net save 2% of GDP, it would require government deficits equal to 6% of GDP. If the private sector is going to save 5% of GDP (equal to the 2002-2007 average pre-crisis) and a current account deficit equal to 4% of GDP then we must have an overall government budget in deficit equal to 9% of GDP. Given the current state of affairs, government deficits of this magnitude might be politically unfeasible right now. (Rezende 2015a)
In 2015, Brazil’s budget deficit increased from 2% of GDP in 2008 to 10.38% of GDP in 2015. Though government deficits support incomes (cash flow and portfolio effects) and stabilizes profits, the bad composition of the government budget, that is, virtually the entire deficit is due to interest payments, did little to sustain employment. Brazil’s primary budget balance swung from a surplus of 3% of GDP over a decade to a deficit. As this happened, credit rating agencies’ decision to downgrade Brazil’s sovereign debt to junk status put Ms. Rousseff under growing pressure to cut public spending. In this regard, with the implementation of austerity policies in 2015 automatic stabilizers were switched off, that is, the real growth (deflated by IPCA) of expenses by the central government sharply declined (figure 1) aggravating the recession. continue reading…
This part of the series (see Parts I and II, here and here) will focus on macroeconomic and microeconomic aspects of financial fragility and the provision of liquidity. Minsky’s framework not only sheds light on how to detect unsustainable financial practices, but the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory. This is a Minsky crisis in which during economic expansions market participants show greater tolerance for risk and forget the lessons of past crises so economic units gradually move from safe financial positions to riskier positions and declining cushions of safety. continue reading…
Jim Vrettos, a sociologist at John Jay College and host of “The Radical Imagination”, interviewed the Levy Institute’s Randy Wray on how the discipline of economics has gone astray. Wray’s story begins in the late 1960s, with what he describes as a reaction against “New Deal economics.”
The interview ends with a discussion of the ongoing US presidential election.
This series will discuss at length the underlying forces behind Brazil’s current crisis. (See Part I here)
Building on Keynes’s investment theory of the cycle, Minsky’s work suggests that the structure of the economy becomes more fragile over a period of tranquility and prosperity. That is, endogenous processes breed financial and economic instability. While Minsky adopted Keynes’s “investment theory of the cycle,” he added a financial theory of investment, with a detailed exposition of the theory in his book John Maynard Keynes (1975), which put at the forefront the interrelation between investment decisions and the financial structure designed to allow economic units to take positions in assets by issuing debt. In this regard, debt accumulation is at the core of Minsky’s instability theory. His financial theory of investment incorporated Kalecki’s approach in which aggregate profits are created, mostly, by the autonomous components of demand (Minsky 1986, 1989). One can add to this analysis Godley’s three balances approach, which explores the interlinkages between the government sector, the private sector, and the external sector. This means that a surplus must be matched by an equal deficit and flows accumulate to stocks.
In this regard, Godley’s framework sheds light on the identification of financial fragility at the macro level, in which, to accumulate financial wealth, the private sector (firms and households) needs to spend less than its income. This can be accomplished through a combination of government budget deficits and current account surpluses. This framework is then incorporated into Minsky’s theory of the business cycle to analyze Brazil’s current crisis. In particular, Minsky’s framework not only sheds light on how to detect unsustainable financial practices, but the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory.
This article attempts to demonstrate the existence of endogenously generated instability in the Brazilian economy, which has created frequent and systemic financial crises. Brazil’s current crisis is not due to unsustainable policies; the country’s problem is systemic. continue reading…
A crowdfunding campaign starting October 2016, on Indiegogo:
Overall aim: To complete the publication of all of Keynes’s remaining unpublished writings of academic significance.
Only about one third were published in the Royal Economic Society edition. A huge quantity of valuable unpublished material remains, scattered across 60 archives in 6 countries.
Aim of this campaign:Preparation of the Eton and early Cambridge volumes.
Campaign start: 11 October 2016.
To locate project: Google ‘JMK Writings Project Indiegogo.’
It is also planned, with publisher cooperation, for the campaign to assist selected universities in developing countries.
How you can help:
Spread the word prior to the campaign launch – to academic colleagues (in economics or elsewhere), students in classes, conference participants, policy-makers, parliamentarians, philanthropists etc.
Make, and encourage, donations, of ANY size, according to your situation. Especially on the first or second day of the campaign. Experience shows that strong starts are correlated with strong finishes.
Editor: Professor Rod O’Donnell, University of Technology Sydney, Australia.
This is the first in a series of blog posts on the Brazilian crisis.
A consensus has emerged in Brazil (and elsewhere) blaming Rousseff’s “new economic matrix” policies for the country’s worst crisis since the Great Depression (see here, here, here, here, and here). With the introduction of policy stimulus through ad hoc tax breaks for selected sectors seen as failing to boost economic activity and the deterioration of the fiscal balance — which posted a public sector primary budget deficit in 2014 after fifteen years of primary fiscal surpluses — opponents argued that government intervention was the problem. It provided the basis for the opposition to demand the return of the old neoliberal macroeconomic policy tripod and fiscal austerity policies. There was virtually a consensus that spending cuts would create confidence, reduce interest rates, and stimulate private investment spending. Fiscal austerity, according to this view, would be expansionary and pave the way for economic growth.
However, there is an alternative interpretation of the Brazilian crisis: as the result of endogenous processes that created destabilizing forces, reducing margins of safety and increasing financial fragility. As Minsky put it, “stability is destabilizing.” The success of traditional stabilization policies over substantial periods has created endemic financial fragility and rising domestic and external private indebtedness, causing the deterioration of the current account and the fiscal balance. This crisis was aggravated by the pursuit of structural stabilization policies in 2015, in an attempt to produce a fiscal surplus, which caused further deterioration of fiscal deficits and government debt followed by the collapse of economic activity.
1. Minsky’s Instability Theory
In Minsky’s work, he extended Keynes’s investment theory of the cycle to add the financial theory of investment to demonstrate that, in a modern capitalist economy, investment decisions have to be financed and the liability structure created due to those investment decisions will generate endogenous destabilizing forces. His theory of the business cycle, grounded in his financial theory of investment, shows that a capitalist economy is inherently unstable due to the interconnectedness of balance sheets of economics units and cash flows. From this perspective, while the financial system in a capitalist economy plays a key role in providing the financing to business to promote the real capital development of the economy, it also plays a key role in creating destabilizing forces.
Minsky’s framework not only sheds light on how to detect unsustainable financial practices, the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory. continue reading…
The global market was eagerly waiting for the July Monetary Policy Statement of the Bank of England (BoE). Speculation was rife that, post Brexit, the BoE would become the latest entrant into the set of central banks experimenting with negative interest rate policy (NIRP) in a desperate bid to reinvigorate its economy.
Remember that the global financial markets were shaken after the referendum result and the pound plunged to a three-decade low. The BoE governor Mark Carney had to step in with a pledge to provide $345 billion for the financial system of the country. He also issued a statement that “the BoE has put in place extensive contingency plans” to deal with a “period of uncertainty and adjustment.” Analysts had their own predictions regarding the BoE’s possible monetary policy stance. JPMorgan Chase & Co., Goldman Sachs, and ING Bank were of the opinion that the BoE could lower its key interest rate in its July meeting. The result of a Bloomberg survey showed that in the event of Brexit, credit-easing measures such as quantitative easing (QE) and rate cuts may be the immediate options resorted to. The global importance of Brexit could be gauged from the fact that the Fed has had to delay to the fourth quarter of this year its plan of a possible interest rate hike in a bid to support global economic recovery.
However, the market was left surprised by the BoE’s decision to maintain its bank rate unchanged. The Monetary Policy Committee at BoE voted 8-1 to leave borrowing costs at 0.5 percent and hinted that it would launch a stimulus package in August. Today, the BoE reduced rates to 0.25 percent.
But why did NIRP not find favor with the BoE? After all, by the end of March 2016 as many as six central banks had adopted NIRP in an attempt to counter sluggish growth and deflationary pressures (fig 1). The latest country to join this mad race is the Bank of Japan, which announced in its January 2016 monetary policy statement a negative interest rate of –0.1 percent to current accounts that financial institutions hold at the Bank. continue reading…