Edited by L. Randall Wray and Mathew Forstater
Chapter 3: Exploring the Economics of Euphoria: Using Post Keynesian Tools to Understand the US Bubble and its Aftermath
Robert W. Parenteau INTRODUCTION During periods of prolonged economic growth and robust ﬁnancial asset returns, an economics of euphoria, as the late Hy Minsky described it, can be described. Rising asset prices can act as an accelerant on investment spending and as a depressant on the household saving rate. These shifts can fuel boom conditions in the economy, further validating an asset price appreciation. A self-amplifying feedback loop is introduced, taking portfolio positions and economic behavior far from a sustainable path. Private sector deﬁcit spending is encouraged by asset price appreciation. Eventually, private deﬁcit spending leads to a private debt build-up, which in turn can bring the economy to a state of what Minsky termed ﬁnancial fragility. However, under certain conditions, the emergence of the ﬁnancial fragility in the later stages of asset bubbles can be thwarted. In a private closed economy, any attempt by businesses to deﬁcit spend on capital equipment due to an equity bubble can be frustrated as household savings fall in response to the asset bubble. Rising proﬁts, via the Keynes/Kalecki proﬁt equation, result as investment spending increases exceed household savings increases. This improves the internal funds available for ﬁrms to service their debt, thereby reducing their ﬁnancial fragility. By moving to the more realistic setting of an open economy with a government sector, ﬁnancial fragility conditions become less likely to be thwarted. A private sector debt build-up will tend to arise during an asset bubble in an economy with a...
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