Calm before a deathly debt storm

Conventional economists like Ben Bernanke were tricked by low volatility preceding the financial crisis. But a period of tranquility is normal before an economy is sucked into a treacherous vortex of debt.

In 1992, I built a model of Minsky’s ‘Financial Instability Hypothesis’ that simulated the debt-induced breakdown he argued could happen in a capitalist economy. But it also had an unexpected feature: the breakdown was preceded by a period of apparent stability. Initial volatility gave way to a period of tranquillity, which was then followed by increasing volatility and finally a breakdown (see Figure 1: the two variables are the employment rate and the wage share of GDP):

Graph for Calm before a deathly debt storm

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