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This was the paper that Minsky, Tobin and others worked from in refining their theories of debt instability.

The reference to "so-called cycle theory" - it should be NB that at that time, the whole matter of business cycles (which we now take for granted) was a controversial theory in economics and business.

Thanks for posting this excellent article. I read every word of it and found it both prescient and ominous.

At least on my initial reading, the only point at which I had some resistance to the author’s ideas was his theory of reflation. My problem is not with the theory; theoretically, it appears logical and a well-founded antidote to the debt-deflation spiral.

However, is reflation workable? IOW, how, practicably, could reflation be implemented in today’s real economy in the U.S.?

Another thing to muse on: the author points to when debtors’ attempts to reduce debt actually increase indebtedness as the point at which the economic boat is more likely to capsize than to right itself. But it is also a fact that you can’t “stimulate” confidence. IOW, now that people have had the pajamas scared off them, the contraction in consumer spending will continue until it ends, IOW regardless of price stability (though I agree that deflation sucks even more confidence out of consumer spending over time).

So it seems to me that there is a point at which the dearth of confidence cannot be restored through reflation.

Then what?

In our current economic picture, it is critical that we include two things that most economists are neglecting.

The first is to consider all the variables, not just the traditional variables. A great example of this is that when thinking of debt, the US national debt comes to mind, some $10T. And while that is bad, it is dwarfed by the markets. One market in particular, derivatives, has debt more than 15 times greater than the US national debt. That is, over $150T! That is more money than exists in the world.

This matters, because this “imaginary money”, created through leverage, drains the market of liquidity that could be used to deficit spend by the US government. If it is not there, the US government automatically has to have a balanced budget, or even a budget surplus. They have no choice in the matter.

If they decide to just “print money”, not backed by debt, it is called “monetizing the debt”, and every dollar translates to inflation, which negates their printing of money. At the consumer level, this could result in monetary deflation at the same time as price inflation.

Which is bad.