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The following article appeared in Left Business Observer #63, May 1994. It was written by Doug Henwood, editor and publisher. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.

After non-collapse

This is the edited transcript of a talk given by LBO editor Doug Henwood at a panel sponsored by Monthly Review during the Socialist Scholars Conference in New York City, April 2, 1994. The screed referred to in the opening paragraph was published as `Financial Collapse" in issue #37.

Four years ago, I sat on one of these panels and pondered the session's title, "Collapse of the Financial System?" There was, thankfully, a question mark at the end of the title, not an exclamation point. Before taking on today's topic, "The Long Decline," it might be nice to revisit some of that old territory.

We didn't know it then, of course, but April 1990 was three months before the 1990-91 recession officially began. At that point the economy had pretty much stalled out. Growth in GDP, the great totem of mainstream economic thinking, had really peaked about the time of the 1987 stock market crash, and had been trending irregularly downward until it was going virtually nowhere when George Bush took office in 1989. So in the spring of 1990 we were in the grip of a great stagnation, but no formal downturn.

Many analysts, radical and otherwise, were a little scared of what might happen next. Was the U.S. economy like the cartoon Roadrunner, beating his feet over a chasm after having overrun the cliff, but not yet falling? Would the great debt buildup of the 1980s -- which really started in the 1970s -- have its revenge in a great deflation of the 1990s? Put another way, how would the U.S. economy respond without the stimulus of increasing leverage? As the decade turned, debt growth had slowed to a relative crawl, and that was a good bit of the reason why the economy had turned stagnant if not fully sour.

The economist Hyman Minsky, one of the great post-Keynesian students of finance, has a good model for talking about debt. He divides financial structures -- of firms, households, or countries -- into three classes: hedge, speculative, and Ponzi. A hedged financial structure is one that can comfortably meet it interest payments and eventually pay off principal out of current income. A speculative unit can meet its interest obligations, but finds it impossible to pay off the principal when it comes due -- it needs to roll it over, that is, pay off the old debt with the proceeds of a new one. And finally, a Ponzi unit is one that can't meet any of its obligations, interest or principal, without selling off other assets or having some blessing fall from the sky. The name comes from the famous financial con game run by Charles Ponzi, which promised huge returns to investors -- but could pay off the first round of plungers only with money taken in from a second round, the second fro