Minsky Mention

In a guest post a EconMatters, Kurt Cobb asks, Could HIgh Oil Prices Cause A Global Economic Deflation?

In the course of answering this question, Cobb brings in Hyman Minsky and financial instability.

"Cars don't budge without gasoline (unless you can afford an electric one) and most people need their cars to get to work. The heat can be turned off rather quickly by the utility company in comparison to the glacial pace of a mortgage foreclosure that can take many months and sometimes more than a year.

"This situation is particularly problematic because it pulls money out of the financial sector. And, despite all the nonsense about the financial industry being on the mend, the industry is actually becoming more and more vulnerable by the day as it increases its exposure and leverage to financial and commodity markets....

"As Hyman Minsky might put it, stability and prosperity lead to instability and crisis as market participants become more and more emboldened on the upswing creating the illusion that all is well. Then, when prices and credit expansion go beyond what the economy can sustain, a decline ensues that is often dramatic as confidence suddenly shifts to revulsion and fear.

"As housing prices continue to sink, the immense amount of bad mortgage debt still floating around the financial system becomes even more putrid than before. Someday the institutions which hold the debt will have to stop pretending that they are going to get paid back.

"However, the prelude to that will be deflation brought on by the high prices of oil and commodities which tend to depress economic activity as household spending is reserved for essentials rather than discretionary items...."

Cobb makes a good case about how another oil shock could push this fragile system over the brink into a classic debt-deflation. With MENA in turmoil, his post not only raises timely questions bot also makes one wonder why it is taking the US and world so long to break the oil addiction before the inevitable overdose.