According to Minsky theory there are three basic modus vivendi of a financial unit: hedge, speculative and Ponzi. For hedge units cash receipts exceed cash payment commitments, for speculative units they are equal and for Ponzi units cash receipts are insufficient to match obligations and require taking additional debt on a regular basis.
The main and major problem of our economy is that millions of families and thousands of businesses were able to run Ponzi scheme of operation for substantial amount of time, some of them for over a decade. That was possible thanks to the Autumn period of the Kondratieff wave, where interest rates are constantly falling thus providing the incentives to increase the debt levels substantially above the levels possible in previous periods. The last time U.S. economy was in Kondratieff Autumn in 1920s and it ended badly.
Every Ponzi unit eventually either bankrupts on its own personal pace or participates in a wider Minsky moment, i.e. widespread risk aversion of creditors away from Ponzi units.
The only two scenarios that can potentially prevent the bankruptcy of a Ponzi unit are:
- Substantially increase the cash receipts on a permanent, not temporary basis
- Substantially reduce the outstanding debt that will convert (upgrade) the Ponzi unit to at least the speculative unit
As far as I can see none of the proposed measures is addressing the problem even in a slightest manner. It was just used as an excuse for Bush and his GOPniks to push their personal agenda of cutting taxes for riches.
I outlined my own proposals in one of the previous posts
At this moment the way #1 is pretty much impossible for most, especially in a declining economic environment. The $800 will not help unless it is sent every month.
And the way #2 for most corporations and families means bankruptcy or foreclosure. Mish recently observed a trend of intentional foreclosures, i.e. a person decides to foreclose on “his” house not because he can’t keep up with the payments but because he observes that foreclosure is a sound financial decision in his case. So, instead of wasting budget money to prevent foreclosures they must work to make the foreclosure less painful. It’s not good to waste your time – it’s better to foreclose when you are young and still keep your savings than foreclose when you are old and maxed out on your credit cards