Bond Wave Mapping 3: Private Debt Cycle

BOND WAVE MAPPING: CASE STUDY 3
Private Debt Cycle Along the Bond Wave

Originally published July 23, 2016
Last edited July 17, 2017
by Michio Suginoo

Sidney Homer, in his chart of the centennial best credit frontier or “Homer’s Saucer,” left us a notion that the state of money has something to do with the evolution of the Western civilization. Homer’s notion extends to a life cycle of civilization. In studying the bond wave, I intend to contemplate Homer’s notion in a shorter horizon, say secular time frame. Using the bond wave, by observing a long-term transformation in the relationship between bond yields and other metrics for an extended period of time, my attempt is to capture a notion that the state of money mirrors a broader socio, political, and economic reality.

Bond wave mapping provides a heuristic approach to apply historical analogy to make inferences about our present and future based on our past.

This section reviews the private debt cycle along the bond wave.

Overview: Secular Rhythm of Private Debt-Money

During the most recent bull bond wave, the Globalization Wave, private sector in the United States observed a cycle of finance-fed financial crisis. It can be simplified in the following chain of events:

Economic stability, accompanied by low interest rates, brought finance-fed excess demand;
the excess demand translated into an economy of scarcity, or supply shortage, and raised price and profit margin;
a higher profit margin legitimized an expansion of supply capacity;
when the bubble busted, deleveraging process kicked in;
price fell and profit margin was squeezed;
the completion of the supply expansion followed, resulting in an economy of abundance;
the abundance in supply capacity amplified the deflationary effect that deleveraging process initiated and further reduced the profitability;
the cost to introduce new innovation into production process became more affordable;
reduction in profitability compelled business to cut down the fixed costs and introduce new innovation into production,
it changed the market structure of job, reducing labour demand.

Of course, besides these events, this period was accompanied with other trend—hollow-out, outsourcing of manufacturing functions to developing economies—amplifying the structural shift of economy.

In this chain of events, the role of money was significant. Changes in the supply of money transformed the structure of economy. This period observed the non-neutrality of money. This reading reviews the non-neutrality of money through private debt cycle along the bond wave.

Two recent bull bond waves demonstrated remarkable synchronization with private debt cycles. In this section, we project the secular rhythm of private debt activities over the bond wave by applying “bond wave mapping” with four metrics:

Private debt level;
Private debt to GDP ratio;
Velocity of money; and
Money multiplier.

As a reminder, the recent five bond waves are defined as follows:

the Victorian Wave from 1798 to 1897;
the International Gold Standard Wave from 1897 to 1920;
the Vacuum Wave from 1920 to 1946;
the Reconstruction Wave from 1946 to 1981; and
the Globalization Wave, ongoing since 1981.

A more detailed definition of the bond wave is described in Secular Rhythm of Bond Wave.

In brief, two recent bull bond waves have mirrored historical rhythms in their private debt cycles: the private debt level peaked during these bull waves and, thereafter, manifested destructive, systemic financial crises thereafter: the Great Depression during the Vacuum Wave, and the Global Financial Crisis during the Globalization Wave.

In 1928(during the secular bull “Vacuum Wave”) the Great Depression broke out.
In 2007 (during the secular bull “Globalization Wave”) the Global Financial Crisis broke out.

Briefly, the two bull bond waves－the Vacuum Wave and the Globalization Wave－demonstrate two similarities below.

Each bull wave contains one private debt cycle, which is measured by the private debt to GDP ratio.
Each bull wave experiences a persistent decline in the real velocity of money after the systemic financial crisis.

These systemic financial crises distinguish themselves from other types of economic distress in the following aspects.

Epicentre and transmission hub: These two crises emerged from the core centres of global economies and their negative impacts spread to other major economies and peripheries. In the Global Financial Crisis, the negative impact of the collapse in US subprime mortgages spread rapidly worldwide. In comparison, the Great Depression required two steps to unfold: Black Thursday of 1929 was “largely a U.S. phenomenon”; the European crisis of 1931, emanating from central Europe, was transmitted via London to become “a worldwide contagion.” On one hand, it could be deemed that the link between the American stock market collapse of 1929 and the global contagion of the systemic banking crisis of 1931 is tenuous in the Great Depression; on the other, capital that had moved to central Europe from the United States during the 1920s reversed in the 1930s, suggesting a link between the two incidences. (James, 2009) Nevertheless, despite differences, both the Vacuum Wave and the Globalization Wave share these two elements: core centres of global economies, namely London and New York, acted as transmission hubs to amplify these crises to a global level; and banking systems acted as mechanisms of systemic contagion.
Prolonged economic distress: These two crises were preceded by leveraging processes and followed by debt deflation. As Irving Fisher elucidated, debt deflation caused protracted economic distress in the real economy. This is expressed in the collapse in the velocity of money as well as in the compression of net assets in the private sector: depressed asset prices and the unchanged/fixed legacy debt level in nominal terms.
The scale of government interventions: although the measures taken differ between these two cases, massive government interventions followed in both: fiscal expansion for the former case; monetary expansion for the latter.

The creation, destruction, and evaporation of modern money

Modern money is primarily created (or destroyed) through two major dynamics: debt creation (repayment) through commercial lending in the private sector; and monetary policy adopted by central banks (McLeay, Radia, & Ryland, 2014, p. 16).

Commercial lending is a private sector’s money creation activity: debt money increases by lending and decreases by repayment, and even evaporates through defaults in the system. More importantly, money is not neutral, since it affects real economy in the long term.

According to Hyman P. Minsky (1985), the state of the economy influences the psychologies of economic actors—savers, lenders, and borrowers—transforming their profit expectations (income expectation and expenditure preferences) and liquidity preferences and, ultimately, their economic behaviours; then changes in their behaviour feed back into the state of the economy. The period of economic stability induces the psychologies of these economic actors to expand the leverage in the system:

savers spend more than save;
lenders seek an expansion of their market share in lending; and
borrowers justify their borrowing for profit (or utility) expansion.

Then, it triggers transformations from stability to instability in the following order:

the net debt level increases and the debt money expands;
as time goes by, the increase in financial leverage becomes excessive, and accounts for the destabilising factor; when the momentum of the economic stability recedes, the excess leverage in the system results in a series of default in debt-service; and
as a consequence, debt money evaporates. (Minsky, 1992, pp. 7-8; 1985, p 13)

Consequential deleveraging becomes destructive to the economic system. If it involves corporate sector, it would compel business to mobilise new innovations to cut labour cost. A dire job expectation destroys consumptions, consequentially, the aggregate demand. It would annihilate the money multiplier in the long run. As Hyman Minsky noted, “stability is destabilising,” and money affects real economic activities: therefore, money is non-neutral. And real economy transforms from one state of disequilibrium to another, proving that economic forecasts based on equilibrium are nothing but fallacy.

Private debt cycle metrics

To capture the rhythm of the private sector’s debt money along the bond wave (i.e., expansion, destruction, and evaporation), this readings applies bond wave mapping on the following metrics:

the private sector’s debt level, both in dollar terms and in relative terms in relation to GDP to gauge leverage in the system;
the velocity of money to gauge debt money’s non-neutral impact on the economy; and
the money multiplier to gauge the effectiveness of the monetary base in promoting the creation of the private sector’s debt money and its circulation.

Due to constraints in the availability of statistics, we trace both the US private debt level and velocity of money only after 1916.

Private Debt Cycle during the Vacuum Wave

The following three charts—Chart 3.3.1.a, Chart 3.3.1.b, and Chart 3.3.1.c—cover the period 1916 to 1950 to illustrate the evolution of US private debt around the Great Depression. While the first chart measures the level of private debt and GDP in dollar terms, the second chart traces the relative ratio of private debt to GDP. The third gauges the money multiplier, the driver of money creation in the private sector.

In Chart 3.3.1.a:

The debt level rises from $76.5 billion at the beginning of the chart;
It more than doubles at its peak in 1929, the year of Black Thursday, reaching $161.1 billion;
Thereafter, it reverses course, together with GDP, to demonstrate the post-crisis deleveraging process by dropping by about 22% toward the inauguration of FDR in 1933; and
Finally, with a series of massive fiscal expansions throughout the New Deal era, it stabilizes within a reasonably narrow range until the beginning of the WWII.

During the war, the debt level rises moderately, by 17% from its pre-war bottom to $144.7 billion at the end of the WWII; entering the period of the Reconstruction Wave, its post-war level regains upward momentum, together with GDP, to greatly exceed the pre-crisis level.

Now we shift our attention to the private debt in relative terms. In Chart 3.3.1.b, along with the time horizon of the Vacuum Wave (bull), the total private debt-to-GDP ratio captures one debt cycle. The proportion of leverage in the system measured as relative to GDP starts expanding from the early bottom at 122% in 1920, the start of the bull bond wave; peaks around its middle at 233% in 1933; then bottoms at its end, at 63% in 1945. This timeline demonstrates a remarkable synchronization between the private debt-to-GDP ratio and the Vacuum Wave. Caution is needed in this interpretation. This notion of synchronization is not with regards to the oscillations between these measurements. The feature described here as the synchronization is that one private debt cycle (a pair of rising and declining waves) fits into one single bull wave.

The peak in the debt-to-GDP ratio lags that of the debt level. During this lag, the ratio continues to increase, it is because the denominator, GDP, declines more drastically than the numerator, debt level, from Black Thursday to the beginning of the New Deal program. Therefore, the debt-to-GDP ratio’s surge (in the absence of a rise in debt level) is a manifestation of the destructive impact of the Great Depression on the GDP. This destruction is expressed in the rapid decline in the velocity of money in the same chart.

How money affects GDP

Next, we briefly overview the transformation of the non-neutrality of money—in other words, how money affected GDP—by tracing the velocity of money: GDP divided by M1 or M1 Equivalent. Although the velocity of money might not be considered the measurement of the non-neutrality of money, it illustrates the impact of money on GDP in its trajectory.

M1 is a measurement of money in circulation. Since the Federal Reserve Bank did not release M1 statistics before 1959, for the period prior to 1959 we must employ a proxy for M1 to construct the chart approximating the velocity of M1 money stock: Friedman & Schwartz’s M1 series before 1946; Rasche’s M1 series for 1947 to 1958. (Carter et al., 2006, pp. Vol 3: 604-607) We call these proxies collectively “M1 Equivalent” for our discussion purposes. We measure the velocity by dividing GDP by M1 Equivalent. Chart 3.3.1.b illustrates the trajectory of the velocity of M1 Equivalent from 1916 to 1952.

The velocity measure, after increasing from 3.04 to 3.67 during the period 1916 to 1920, remains high, with the exception of a dip from 1921 to 1922, peaking at 3.89 in 1929, the year of Black Thursday. Thereafter, it reverses direction downward to the end of WWII, although it demonstrates some stability during the New Deal era and some rebound in the mid–WWII period. In brief, until the beginning of the Reconstruction Wave, the velocity of money fails to demonstrate a sustainable recovery.

In principle, the velocity of money collapses significantly throughout the post-crisis period—from Black Thursday until the end of WWII. The post-crisis deleveraging process impairs the velocity of money. Overall, the large-scale fiscal expansion of the New Deal and the WWII special war demand did not reverse the post-crisis collapse in the velocity of money. It took another massive fiscal expansion, the post-war reconstruction effort, to restore the velocity of money: it required a series of unconventional fiscal expansions and possibly the destruction of war. Here as well, the rhythm in the non-neutrality of money and the bond wave demonstrate a remarkable synchronization.

Finally, Chart 3.3.1.c demonstrates “bond wave mapping” over the historical chart of the money multiplier. The M1 money multiplier—M1 or M1 equivalent divided by the money base—gauges the effectiveness of the monetary base in promoting the private sector’s ability to create money.

The monetary authorities can directly influence the monetary base; nevertheless, they can only indirectly induce the money multiplier. The latter is the work of the private sector’s debt money creation through commercial lending: this mechanism drives the circulation of money in the private sector. This chart shows that the monetary authority’s influence over the circulation of money is indirect and uncertain.

In 1929, the year of Black Thursday, the money multiplier (M1 multiplier in the chart) reached its high of 4.4, remaining relatively stable for one year, then plunged to 2.72 in 1934. Along with the progression of the New Deal program, it made a momentary recovery until 1937 to 3.25, then collapsed again until the year before the US participation in WWII. This suggests that while the New Deal boosted the money multiplier for a short term, it did not fully restore its sustainable mechanism. It took WWII—another massive fiscal expansion and the destruction of war—for the money multiplier to restore itself.

Now, in order to take a closer look at the interaction between the monetary base and M1 equivalent, Chart 3.3.1.d tracks the year-over-year (YoY) change in both the monetary base and M1. Overall, this chart reveals that the change in M1 equivalent tends to lag the change in the monetary base.

The one-year stability observed earlier in the money multiplier from 1929 to 1930 is because both metrics, M1 and the money base, declined moderately at comparable rates. Then, despite an increase in the YoY rate of change in monetary base up to 6% from 1930 to 1932, the YoY change in M1 made a remarkable decline. It requires an even stronger rate of increase in the monetary base—from 6.4% to 18.4% from 1933 to 1935 to boost the YoY change in M1 money. This coincides with the early stage of FDR’s administration and the New Deal programs (fiscal expansion).

Thereafter, for the rest of the New Deal era, the YoY rate of change in the monetary base again plunges from its peak of 18.4% in 1935 to –7.2% in 1937. Accordingly, M1 demonstrates a drop in its YoY rate of change. This implies that the absence of an increase in the monetary base might be associated with the plunge in M1 in the aftermath of the financial crisis.

Then, WWII reverses the course of events. From its onset, the YoY rate of change in M1 increases to 30.5% in 1943, lagging behind the drastic increase in the monetary base that has taken place since 1938. Thereafter, despite a drop in its level, the YoY rate of change in M1 remains above the zero line, with a minor breach from 1948 to 49. This illustrates the background behind the remarkable recovery in the money multiplier after 1940.

So far, we have observed one historical debt-cycle case along with the Vacuum Wave. Next, we move to another case in the Globalization Wave.

Private Debt Cycle
During the Reconstruction and Globalization Waves

Chart 3.3.2.a tracks the level of private non-financial debt and GDP during two bond waves—the Reconstruction Wave and the Globalization Wave. The private non-financial debt level and GDP rise gradually at roughly the same rates during the Reconstruction Wave. Entering the Globalization Wave, the private non-financial debt level accelerated faster than the GDP and made its near-term peak at USD 24,741 billion in 2008 at the onset of the Global Financial Crisis. However, unlike the case of the Great Depression, it did not collapse afterwards. Instead, after a temporary setback, it kept rising. From this dollar term chart, the debt level does not form one cycle—a pair of a rising and a declining trends—in contrast to the case of the Great Depression.

When we measure the debt in relative to GDP, the relative ratio of private non-financial debt to GDP in Chart 3.3.2.b demonstrates a declining trend during the aftermath of the Global Financial Crisis.. In 2008, the ratio peaked at 1.68, then declined notably for some time to 1.46 in 2014 before stabilizing briefly.

Now when we trace the velocity of money the impact of money on GDP, the presence of one cycle appear more clearly. In terms of the velocity of M1, it peaked at the outset of the crisis and collapsed near the end of the Vacuum Wave. This is in line with the Great Depression case.

Now we turn to the money multiplier for this period in Chart 3.3.2.c. Like the previous case of the Great Depression, the money multiplier plunged rapidly after the outbreak of the Global Financial Crisis in 2007. Its level collapsed from 1.61 in 2007 to the historical low of 0.71 in 2014. The chief contrast is the trajectories of the monetary base between the Great Depression and the Global Financial Crisis (dark blue lines in Chart 3.3.1.c and Chart 3.3.2.c, respectively). In the former case, the monetary base did decline in the aftermath of the crisis; in the latter case, it made a historic surge. Despite the historic boost in the monetary base by the monetary authority, the money multiplier collapsed. This shows us that the increase in the monetary base was not effective in restoring the private sector’s ability to drive the circulation of money.

It also suggests that the historic surge in the liquidity expansion supported the persistence in the level of private non-financial debt after the crisis (Chart 3.3.3.a). The deleveraging process, an automatic adjustment mechanism to liquidate excess leverage in the aftermath of the systemic financial bubble, may have been compromised by the liquidity expansion. On the other hand, it failed to boost the money multiplier. This translates into the lack of demand. This is a reflection of the failure of the policy response in restoring a primary driver of the economy, income expectation and employment. This implies the need for a demand side measure.

Since quantitative easing (QE) allowed the monetary authority to purchase private securities directly, the QE process does not necessarily involve an adjustment of the monetary base in its passage. The monetary authority, through its direct involvement in private securities, has impaired the auto-correcting demand-supply mechanism—or the price discovery mechanism, if you like—of the market, and may have failed to allow the money multiplier mechanism (the private sector’s economic driver) to be overhauled.

Resemblances and Differences
in Two Private Debt Cycles

These “bond wave mappings” revealed recurrences and the evolution of the debt cycle by expressing resemblances and differences in two systemic financial crises: the Great Depression and the Global Financial Crisis. Here is a brief recap of the recurrences and evolutions in the debt cycle over the bond wave.

Resemblances: Recurrent Features

Bond wave location: Both the Great Depression and the Global Financial Crisis unfolded during bull bond waves: the Vacuum Wave and the Globalization Wave, respectively.
Immediate negative impact on GDP: The peaks in both debt-to-GDP ratios lagged the onsets of financial crises, reflecting an immediate negative impact on GDP that was more severe than more gradual negative impacts on debt level would be.
Non-neutrality of money: In both cases, the velocity of money peaked at the onset of these systemic financial crises and collapsed thereafter.

For the case of the Great Depression: From the outset of the crisis throughout the rest of the Vacuum Wave, despite a series of large-scale fiscal expansions, the velocity of money failed to demonstrate a sustainable recovery until the beginning of the Reconstruction Wave.
For the case of the Global Financial Crisis: Likewise, after peaking at the onset of the systemic financial crisis, the velocity of money maintains a declining trend, as of 2016.

Together with our observation of two immediate negative impacts of the systemic financial crises on GDP, we can confirm the long-term impact of money on the economy.

Differences: Evolution Features

1) Case of the Great Depression:

Debt level: During the Great Depression, a significant drop in the total private debt level of the scale of 23% (from USD 161.8 billion in 1929 to USD 124.5 billion in 1935) revealed a deleveraging process at work in the system.
Monetary policy (Chart 3.3.1.d): At the early stage of the Great Depression, the monetary base was not sufficiently increased by the monetary authority: it was increased by just 15% (from USD 6.06 billion in 1929 to USD 7.02 billion in 1933). An increase in the monetary base lagged in time until the New Deal programs.
Fiscal policy (Chart 3.3.1.d): The massive fiscal expansion of the New Deal program improved the money multiplier for a short period of time, but proved unsustainable. It was the massive fiscal expansion during WWII that improved the money multiplier. After the end of WWII, the money multiplier managed to maintain a sustainable effect.

2) The case of the Global Financial Crisis:

Debt level: In the aftermath of the Global Financial Crisis, private debt, after a short decline, recovered and continued to rise. In dollar terms, deleveraging is not unfolding in aggregate. The auto-cleansing mechanism, which cleans up excess leverage in the system, of the deleveraging process appears to be impaired.
Monetary policy (Chart 3.3.2c): From the early stage of the Global Financial Crisis, the monetary authority boosted the monetary base in its attempt to restore money circulation (M1). In the aftermath of the Global Financial Crisis, however, despite its historic attempt, the monetary authority failed to restore the money multiplier, measured by M1 divided by the monetary base.
Fiscal policy: The government’s commitment to a convincing scale of fiscal programs had not been confirmed as of 2016. The rise of the president elect Donald Trump may change the course.

The above points reflect the differences in the responses by the US federal government and the FRB between the two occasions. Although the new approach was effective in containing illiquidity at the early stage of the crisis, so far as of 2016, it might prove to be ineffective in restoring the real economy in the long run. It is imperative to focus on job creation. A better employment prospect would restore demand.

The infrastructure development plan suggested by the president-elect Donald Trump might change this course. It might help FRB to unwind the monetary expansion. The question is whether it is comparable to the New Deal policy, or less than that. We need to remind ourselves that the Vacuum Wave required more than the New Deal to reverse. The New Deal effect was temporary. Will the Trump effect be temporary as well?

The difference in government response between the Global Financial Crisis and the Great Depression needs to be contrasted. In the aftermath of the Global Financial Crisis, in order not to repeat the case of the Great Depression, central banks throughout the advanced economies deployed unprecedented monetary easing and avoided the total meltdown of the economy. This
What would be the implication of the current liquidity? Does it add uncertainty in price behaviour? Despite the presence of persistent deflationary pressure, it is impossible to rule out the chance that the Trump effect, if it managed to boost employment, might reverse the bond wave in the long-term (secular) perspective.

It might be noteworthy that the so-called "Long Depression of 1873–96" in the United Kingdom can be located roughly in the latter half of the Victorian Wave, another bull bond wave. This creates another bond wave analogy with the Great Depression and the Global Financial Crisis. However, analysis on this19th century anecdote is not presented here due to lack of data.

Revisiting the debt cycle frameworks:
Hyman Minsky, Irving Fisher, Richard Koo

Now we will briefly overview the frameworks of debt cycle by three economists: Hyman Minsky, Irving Fisher, and Richard Koo.
When the systemic bubble comes to an end and asset prices start declining, deleveraging pressures are inflicted on borrowers through two dynamics: both stock and flow, or the balance sheet and the profit and loss, respectively.

In stock dynamics, the borrower’s balance sheet is impaired in nominal terms in the following manner. On the liabilities side, the nominal value of legacy debt, which has accumulated during the leveraging process, would remain fixed, while on the assets side, the collateral value would start declining. This reduces the net asset—or equity—of the borrower. Borrowers are compelled to protect themselves from declining nominal net asset value or are forced by lenders to liquidate their collaterals to repay existing debts. This leads to fire sales of collateral assets, and further depresses the collateral price.

Further deterioration in the balance sheet inflicts further pressure on debtors to unwind legacy debt. In flow dynamics, profit margins are squeezed. To compensate for the decline in unit prices of their products, indebted producers are forced to increase the sales volume of their products to service their debts. Their debt-service needs lead to over-supply of the product in the market, exacerbating a further price decline, which results in further risks to their profit margins. This is a simplified paraphrase of the debt deflation spiral elucidated by Irving Fisher (Fisher, 1933). The debt deflation spiral shapes the paradigm of a deleveraging economy.

In a deleveraging economy, with dire job prospects and with collapsed or even negative net worth of net borrowers, consumers cut down spending. Declines in both consumption and business activities paralyze the money multiplier (Koo, 2011) and the velocity of money (Fisher, 1933), both of which measure the core driver of the private sector’s money creation: the former measures the impact of the monetary base on money supply; the latter, the impact of money supply on GDP. With the money multiplier incapacitated, an increase in the monetary base is an ineffective means of expanding money supply, and ends up failing to stimulate the economy. The consequence is a protracted period of high unemployment, economic distress, and deflationary pressure. This mechanism is stylized by Richard Koo as “balance sheet recession.” (Koo, 2011)

Moreover, as a consequence of the slowdown in emerging economies, the collapse in resource prices was the by-product of the earlier finance-fed excess expansion in supply capacity. During the earlier period of price rises, resource producers expanded their supply capacity with massive financing. As the demand for resources declined, resource prices collapsed. Accordingly, those producers went into a debt deflation cycle. Legacy debt forced indebted producers to produce more in the face of declining prices in order to service their debts. Debt pressure does not allow indebted producers to reduce the supply in order to restore prices. This pressure is enormous in a debt deflation economy.

In addition, declines in commodity prices transformed the structure of some resource sectors from oligopoly to a more competitive regime. This exacerbated the price decline in those resource sectors: higher collusion prices collapsed as competition for market share intensified.

In this context, three complementary systemic dynamics—leveraging process, bust, and deleveraging pressure—are inevitable, set in succession in the framework of the private sector’s debt cycle.

Hyman Minsky elucidated the private sector’s debt money dynamics: how modern money is created, destroyed, and evaporated within the mechanism of commercial lending in the private sector:

debt issuance gives rise to money creation;
debt repayment results in money destruction; and
default in debt service leads to money evaporation.

Economic stability leads to systemic leveraging; leveraging results in a bubble; its reversal results in financial crisis; and deleveraging results in its consequential protracted economy. This set of financial crisis dynamics seems to be a built-in mechanism of modern money by design. As a result, money can affect the real economy, and is, therefore, not neutral. Furthermore, monetary policy, with the CPI as its primary target, might fail to contain the behaviour of other prices, such as asset price and commodities prices, adding further uncertainty.

In summary, protracted economic stability, leveraging process, financial crisis, debt deflation, and balance-sheet recession—a set of those evolutions in succession is a manifestation of the non-neutrality of modern money. It is encapsulated in Minsky's emblematic phrase, "stability is destabilizing." In Derridean deconstructionist fashion, the cause of instability is contained within stability’s very architecture.[1]

The bond wave mapping shows that the two historic systemic financial crises occurred during two bull waves. Although they unfolded in different manners, in both cases their impact resulted in deflationary pressure to drive down the bond wave. In the case of the Great Depression, it lasted until the end of the bull bond market.

Now we are close to the bottom of the current bond wave in terms of the yield level of the US 10-year treasury note; its timing is yet to be known, especially because US prime corporate bonds have not yet reached their previous bottom of 1946. A relevant question is: What would trigger the next bear wave? To reverse the bond wave, we need to eradicate deflationary forces. In the case of the Great Depression, the reversal of the bond wave did not happen even after two massive fiscal expansions—the New Deal programs and WWII (partly because during WWII, the bond yield was managed by the government). It emerged with the consolidated post-war reconstruction efforts that came after the destruction of WWII.

This section addressed a parallelism in the synchronization between the private debt cycle and bull bond waves. In the next section, we will discuss some aspects of the fiscal cycle, which is largely influenced by the consequence of the modern private debt cycle.

Note

[1] A clear distinction between Minsky and Derrida needs to be mentioned: Minsky’s paradox arises from the very centre of the architecture of the subject, while Derrida’s paradox arises from an eccentric part of the architecture. (Derrida, 1986, p73) A common ground is that a disparate nature emerges in the time lag within the architecture that initially conveyed one single nature. It needs to be emphasised that those two academics most likely came to their similar conclusions, despite the differences in their fields, independently and without knowing each other.

"The very condition of a deconstruction may be at work in the work, within the system to be deconstructed. It may already be located there, already at work. Not at the center, but in an eccentric center, in a corner whose eccentricity assures the solid concentration of the system, participating in the construction of what it, at the same time, threatens to deconstruct. One might then be inclined to reach this conclusion: deconstruction is not an operation that supervenes afterwards, from the outside, one fine day. It is always already at work in the work. Since the destructive force of Deconstruction is always already contained within the very architecture of the work, all one would finally have to do to be able to deconstruct, given this always already, is to do memory work. Yet since I want neither to accept nor to reject a conclusion formulated in precisely these terms, let us leave this question suspended for the moment." (DERRIDA, 1986, p73 )

Reference

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