Thursday, July 2, 2015

Transhumanism, malinvestment and instability

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by Michael Roberts

Camp Alphaville (, the FT’s one-day jamboree on all things economic and financial, had all sorts.  There was a session by Zoltan Istvan, a ‘futurist philosopher’ who has formed a party to stand in the US presidential election to promote ‘transhumanism’, using science and technology to overcome human mortality. According to Istvan, he wants to promote technologies such as bionic hearts, mind uploading, exoskeleton technology, robotics, nootropics, 3-D printed organs, and cranial implants. They also aim to use Artificial Intelligence to reach the Singularity – a point where intelligence is so advanced it becomes unrecognizable to humans. Collectively, these technologies and ambitions will forever alter the human species and make human life on Earth transhuman. Subsequently, they will also create vast amounts of new wealth, commerce, and industry.

Indeed, exotic technological developments was a theme of the FT’s day. But of course, there was a discussion of how to use AI, not in meeting the necessities of humanity but in how to make money from it: how it might soon be deployed in the financial market and how hedge funds are employing machine learning experts and neuroscientists!  AI, robots, singularity and the extension of human life is something I shall try and consider in a future (!) post.

More immediate was the question of whether the world economy, particularly its financial sector, was heading for another fall. There were two interesting points of view: that coming from the Austrian school of economics and that coming from the post-Keynesian Minsky school. Alas, yet again, no Marxist economic alternative got a hearing – perhaps not surprising in a City of London event.
The Austrian school was represented by Claudio Borio.  He is head of Monetary and Economics Department at the Bank for International Settlements (BIS). In 2003, Claudio Borio was one of the few to warn that excessive borrowing, partly encouraged by monetary policy, could lead to a devastating crisis in the rich countries. Since then, he has researched how conventional measurements of “potential” growth fail to take account of unsustainable financial risk-taking, hidden fragilities that can be spotted in the gross flows of the balance of payments, and why consumer price deflation is harmless compared to falling asset prices.

I have commented on Borio’s work before in various posts and his position is really the classic one of the Austrian school, that crises are caused by central banks artificially lowering interest rates below where they should ‘naturally’ be and by pumping in extra liquidity. This creates ‘malinvestment’ by companies and banks because projects that are not really viable become so with less than ‘natural’ costs of borrowing. This malinvestment in property and stocks etc rather than productive investment leads to low productivity growth and stagnation.

Borio presented evidence to suggest that when credit gets very high relative to trend GDP growth over a period, there was an 80% chance of financial crash (see the paper, The financial cycle and macroeconomics: What have we learnt? borio395). Borio predicted the financial crash of 2007, one of the few economists to do so. Now Borio has claimed to have identified what he calls a ‘financial credit cycle’, similar to the cycle of boom and slump in capitalist economies, or to the pr0fit cycle that I have identified (see my book, The Great Recession). Borio argues that “it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle.”

Borio points out that, as traditionally measured, the business cycle (by which he means the cycle of boom and slump in modern capitalist economies) involves frequencies from 1 to 8 years . By contrast, he finds that there is a financial cycle in seven industrialised countries since the 1960s of around 16-18 years. The length of this cycle is similar to 16-18 year profit cycle that I have identified for the US economy (with slightly different lengths for other capitalist economies), although with different times for turning points.

The BIS under Borio has been pushing the prospect of a new crash in financial markets. The unending printing of money and credit injections was creating financial and property asset ‘bubbles’ that would eventually burst and renew the financial crash of 2008 (
Jaime Caruana, head of the BIS, has said recently that the international system “is in many ways more fragile than it was in the build-up to the Lehman crisis”. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since then. Credit spreads have fallen to wafer-thin levels. Companies are borrowing heavily to buy back their own shares. Caruana correctly pointed out how stock and bond markets were racing up to new highs but the ‘real economy’ of output and investment was stuck in very low rates. This suggests a dangerous bubble as higher risk corporate leverage (debt) has risen to new highs.  Indeed, in its very latest report, the BIS argues that a bursting bubble is not far away.

In a similar vein, but from the other end of the heterodox economics rainbow, post-Keynesianism, Steve Keen, head of economics at Kingston University UK, was also at Camp Alphaville. For Keen, a future financial bust would not be due to central banks and ‘malinvestment’, as Borio and the Austrians argue, but because of ‘excessive private sector debt’ which has not been deleveraged since global financial crash. This debt causes financial instability and could lead to a new crash, if not globally, but in Asia, for example.

For my take on Keen’s views, see my recent post on Rethinking Economics (, where Keen also appeared. Clearly, the Minsky (debt instability) view of crises has become popular in both heterodox and mainstream economic circles and even in the City of London.

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