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AI Summary:
Source: “Background: The existence of a Monetary Growth Imperative (MGI) and its implications for economic stability, democracy and environmental sustainability have been put forward by environmental economists for around two decades but recently criticised as invalid. Given the urgency of the climate and ecological crisis alongside spiralling public and private debt, the MGI deserves closer attention. Methods: For this review paper we analysed studies on the MGI, using a selective, iterative approach to the literature review. Results: Our critical review of the research on the MGI revealed several full academic treatments of the argument and even a taxonomy of them, most of which have not been refuted. We articulate one of them in a new way, as well as two more which have not received academic treatment, before considering why it might be thought politically expedient that any MGI should be refuted, or at least seen to be refuted. Conclusion: In any economy where money hoarding and accumulation is not curtailed, and where most of the money in circulation is issued by private banks as debt, with or without interest, there will be a system-wide scarcity of money available to people and organisations to service their debts – unless, that is, there is continual economic growth. To avoid the deleterious implications of a shortfall of money in an economy, policies are used to maintain economic growth, which is therefore a form of imperative on society. This MGI may be accentuated, at a system-wide level, by the practice of full-reserve re-lending of money. Interest is not the main driver of the imperative, but because it increases the transfer of money to those who are wealthy and more likely to hold that money in a stagnant form that is not available for debt servicing by others, interest charges may indeed exacerbate the MGI. We conclude that the debt-money system creates a competition for money between debtors and savers which is resolved through creation of more debt-money, which in turn drives growth and the resulting ecological and climate emergency.”
Source: “This chapter surveys the literature on bubbles, financial crises, and systemic risk. The first part of the chapter provides a brief historical account of bubbles and financial crisis. The second part of the chapter gives a structured overview of the literature on financial bubbles. The third part of the chapter discusses the literatures on financial crises and systemic risk, with particular emphasis on amplification and propagation mechanisms during financial crises, and the measurement of systemic risk. Finally, we point toward some questions for future research.”
Source: “In a series of papers based on analogies with statistical physics models, we have proposed that most financial crashes are the climax of so-called log-periodic power law signatures (LPPL) associated with speculative bubbles (Sornette and Johansen, 1998; Johansen and Sornette, 1999; Johansen et al. 1999; Johansen et al. 2000; Sornette and Johansen, 2001a). In addition, a large body of empirical evidence supporting this proposition have been presented (Sornette et al. 1996; Sornette and Johansen, 1998; Johansen et al. 2000; Johansen and Sornette, 2000; Johansen and Sornette, 2001a, Sornette and Johansen, 2001b). Along a complementary line of research, we have established that, while the vast majority of drawdowns occurring on the major financial markets have a distribution which is well-described by a stretched exponential, the largest drawdowns are occurring with a significantly larger rate than predicted by extrapolating the bulk of the distribution and should thus be considered as outliers (Johansen and Sornette, 1998; Sornette and Johansen, 2001; Johansen and Sornette, 2001; Johansen, 2002). Here, these two lines of research are merged in a systematic way to offer a classification of crashes as either events of an endogenous origin preceded by speculative bubbles or as events of exogenous origins associated to external shocks. We first perform an extended analysis of the distribution of drawdowns in the two leading exchange markets (US dollar against the Deutschmark and against the Yen), in the major world stock markets, in the U.S. and Japanese bond market and in the gold market, by introducing the concept of ‘coarse-grained drawdowns,’ which allows for a certain degree of fuzziness in the definition of cumulative losses and improves on the statistics of our previous results. Then, for each identified outlier, we check whether LPPL are present and take the existence of LPPL as the qualifying signature for an endogenous crash: this is because a drawdown outlier is seen as the end of a speculative unsustainable accelerating bubble generated endogenously. In the absence of LPPL, we are able to identify what seems to have been the relevant historical event, i.e. a new piece of information of such magnitude and impact that it is reasonable to attribute the crash to it, following the standard view of the efficient market hypothesis. Such drawdown outliers are classified as having an exogenous origin. Globally over all the markets analyzed, we identify 49 outliers, of which 25 are classified as endogenous, 22 as exogenous and 2 as associated with the Japanese ‘anti-bubble’ starting in Jan. 1990. Restricting to the world market indices, we find 31 outliers, of which 19 are endogenous, 10 are exogenous and 2 are associated with the Japanese anti-bubble. The combination of the two proposed detection techniques, one for drawdown outliers and the second for LPPL, provides a novel and systematic taxonomy of crashes further substantiating the importance of LPPL. We stress that the proposed classification does not rule out the existence of other precursory signals in the absence of LPPL.”
Source: “…it might not be feasible for a steady-state economy to support a stable debt-based, interest-bearing monetary system without strong interventions.“
Source: “Throughout history, rich and poor countries alike have been lending, borrowing, crashing—and recovering—their way through an extraordinary range of financial crises. Each time, the experts have chimed, ‘this time is different’—claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes—from medieval currency debasements to today’s subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much—or how little—we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts—as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.”
Source: “Aggregate fluctuations and volatility arise from the financing decisions of firms, who face a fundamentally uncertain future. To mitigate this, firms use heuristic rules, e.g., following what the majority do, or assuming their current situation continues indefinitely. The adoption and dissemination of these heuristics depend on the architecture of their social and spatial network. If these rules are accepted to guide investment behaviour, speculative leveraging decisions can propagate contagion effects via networks, resulting in cycles driven by optimistic and pessimistic sentiment. As a result, what may be conventionally seen as a ‘rational’ decision at the microeconomic level, may create an emergent maladaptive (e.g., Fisherian debt deflation) outcome if most agents follow suit. Social networks are then formal mechanisms that transmit speculation, and the network topology is a source of endogenous volatility, which is irreducible to the firm itself.”
Source: “...the current economic and financial system is a roll over of credit into infinity with a locked in requirement for economic growth without which the debt burden (the interest) would quickly amount to more than the worth of the entire economy. With this model, it is also easy to explain and predict economic and financial crisis. When the amount of new loans diminishes, older loans can no longer be repaid, and the economy suffers from a contraction and lower or even negative economic growth... If at some point less loans are issued, then the interest on older loans cannot be serviced and the economy suffers... There are no easy solutions to this situation, but a few economists propose some original and workable measures. For instance, Johnna Montgomerie and Steve Keen insist on the necessity of lowering private debt to restore the ability of households to borrow. However, these measures do not question the underlying monetary and financial system’s model based on debt money created by commercial banks. They merely propose a more engaged and pro-active intervention from public authorities in managing how banks create money (for instance, via credit guidance, making sure that credit is issued not only for consumption of existing goods/services, but also for productive purposes), taxation and monetary policy via central banks (revisiting the idea of « helicopter money » or quantitative easing for the people). In other words, relying on a centralized authority like governments or central banks to implement their solution. Unfortunately, looking at the political situation in many countries, their proposals are far from being discussed, let alone adopted. The debt based monetary system has therefore shown its limits. It is ill suited to weather shocks, or only at extreme human costs, and relies on confidence and the willingness of people to take risks, which in difficult times, creates a pro-cyclical tendency (over-borrowing in ‘good’ times, which creates speculation and unrealistic growth targets, under-borrowing in ‘bad’ times, which exacerbates economic downturns and crisis). Given the challenges ahead, especially climate change, one can easily see that the current financial system is not designed to weather the storm, as the current coronavirus episode is showing us now. There will come a time when governments will be powerless to save the financial system, and so before that day comes, it may be wise to consider transitioning to a new monetary and financial system altogether.”
Source: Boom and bust cycles are caused by cycles of debt accumulation and default that underpin the monetary and financial system: “The cycle process captured by the model works as follows: Debt accumulates gradually through booms due to its interest-bearing nature coupled with the downward wage rigidity that sustains the upward slope. Debt is rolled over frequently because the principal debt feeding the economy is insufficient to cover the interest on top, from a system perspective. Throughout the boom, firm profit shares, interest coverage ratios, and credit spreads all fall structurally and bottom out before the turning point to the recession. At the turning point, the system is so stretched (maximally leveraged) that any small demand perturbation or an endogenous interest rate change induces a cascade of firm defaults and associated debt write-offs. The cascade spreads through demand-side feedback, fueled by dropping income and hence declining consumption for the workers that become unemployed. In addition, feedback through rising debt costs due to realized risk-based debt pricing by banks drags yet other firms into default. After the downturn, a new debt accumulation process starts endogenously… The centrality of interest on debt in the model (as its absence lets cycles disappear), makes the model verge on Islamic finance since one of its defining features is the prohibition of interest. To the extent that there are no hidden forms of interest, or they be at least sufficiently slight, Islamic financial systems may be less procyclical. A small but evolving literature appears to show this empirically. The model may offer theoretical support to such empirical findings… The model’s emphasis on the essence of debt squares well with the importance that policy institutions such as the IMF perceive, including regarding the role of macroprudential policies to pre-emptively curb excessive debt build-ups. Examining how macroprudential policy, besides monetary and fiscal policy, influence cyclical economic behavior in a disequilibrium model as the one considered here warrants much more exploration.”