The first post made the claim that scarcities are ranked, and that in a credit economy money holds the top of the order. It left an obvious question hanging. If money is the master scarcity, why is it not scarce most of the time? For long stretches credit is cheap and plentiful, and the idea that it could suddenly become the binding constraint seems remote. The answer is that the remoteness is the problem. The calm itself is what builds the fragility.
Hyman Minsky gave us the cleanest way to see this. He noticed that the people and firms who borrow can be sorted into three postures, according to how they expect to service their debts.
Three ways to owe money
The first he called the hedge borrower. A hedge borrower earns enough from the thing he bought to cover both the interest and the principal on the loan he used to buy it. He is self-sufficient. Nothing outside his own cash flow has to cooperate for him to stay solvent.
The second is the speculative borrower. He earns enough to pay the interest, but not enough to pay down the principal. He survives by rolling the loan over, taking out a new one as the old one comes due. He is solvent only as long as someone is willing to keep lending. He depends on the market staying open.
The third is the Ponzi borrower, and the name is Minsky's, not an accusation. The Ponzi borrower cannot even cover the interest from what he earns. He survives only by borrowing still more, or by selling the asset itself into a rising market and booking the gain. He depends not just on the market staying open but on prices continuing to climb.
The drift nobody chooses
Here is the part that matters. In a long, calm expansion, the mix of these three postures drifts. It drifts in one direction only: from hedge toward speculative toward Ponzi. And it drifts not because anyone is reckless but because everyone is being reasonable.
When years pass without a serious downturn, the conservative hedge posture starts to look like timidity. The speculative borrower made more money and nothing bad happened. The Ponzi borrower made the most of all. Lenders, seeing no defaults, relax their terms. Borrowers, seeing easy refinancing, take on more. Each individual decision is sober and defensible in the conditions of the moment. The aggregate result is an economy that has, link by link, made itself dependent on one thing above all others: the uninterrupted availability of more credit.
This is the quiet promotion. Without any meeting or any decision, the system has moved money to the top of its order of scarcities. It has arranged its affairs so that the one thing it cannot survive without is continuous refinancing. And it has done so while feeling perfectly safe, because at every step credit was abundant. Stability is not the opposite of crisis. In Minsky's reading it is the incubator of crisis.
The moment the bluff is called
Then something interrupts the flow of refinancing. It scarcely matters what. A shock, a scare, a single large failure. The speculative borrowers suddenly cannot roll their loans. The Ponzi borrowers cannot find the new credit they were counting on, and the rising market they depended on stops rising. Every one of them reaches, at the same moment, for the same thing: cash, to meet the obligations that are denominated in it.
That simultaneous reach is the scramble, and it is the instant money completes its ascent to the top of the order. The demand to hold cash becomes nearly unlimited, and because everyone wants it at once and no one will let go of it, it becomes scarce in fact. An economy that was awash in liquidity the week before cannot find a dollar. Nothing real has changed. The factories and the inventories are exactly where they were. What changed is the rank money holds, and the long calm is what set the change in motion.
So the master scarcity is not always biting. It waits, and it accumulates its claim on the system during precisely the years when it seems least threatening. The next post follows what happens once it does bite: how a shortage of money travels downward and disguises itself as a shortage of goods.