Recherche FFJ Research Statement Yuki TADA


The paradox of debt and Minsky cycle: Nonlinear effects of debt and capital, and variety of capitalism


Candidate of Ph.D. Economics, The New School for Social Research, NY, USA
Visiting researcher, Fondation France-Japon de l'EHESS, Paris, France




The main aim of this paper is to study the variety of financialized capitalism which are contingent on the institution, policy, and path dependency. Using the neo-Kaleckian stock-flow consistent model we study the US and UK shareholder-oriented financialized capitalism using our own version of the Miskyan cycle. Meanwhile, Japanese partially fledged financialized capitalism with high retention rates of firms is analyzed by using the paradox of the debt (Steindl) cycle. The analysis shows (1) instability arises when firms have a high retention rate of profit to deleverage; (2) debt-led Minsky regime and the debt-burdened paradox of debt regime can be distinguished by setting sufficiently low retention rates for the former and sufficiently high retention rate for the latter; (3) both in the Minskyan and Steindl regime we observe fixed capital investment is sluggish and observe secular stagnation in accumulation rate; (4) in the Steindl paradox of debt model, the debt-burdened economic stagnation transforms into a long wave cyclical growth with sufficiently high firms animal spirits, which exhibits the possibility of the investment-led cyclical growth after the secular stagnation from the paradox of debt.

Key Words: Minsky, The Paradox of debt, Capitalism, Growth, Financial Instability, Supercycle
JEL codes: B52, D21, E12, E32


After the end of the Fordist era, we have observed the emergence of financialized capitalism. Regardless of the level of financial fragility in the private sector being procyclical or countercyclical to macroeconomic growth, what we observe in the last couple of decades is a slowdown in fixed-capital investment, especially in developed countries. Similar to Steindl's paradox of debt theory (1952), the balance sheet recession by Koo (2011) has argued that after the asset price bubble burst, Japanese nonfinancial firms have been attempting to fix their balance sheet rather than spending their income on productivity-enhancing investment to expand their production capabilities or pay dividends to shareholders. Minsky (1986) also developed a theory that in the US and advanced countries how firms' higher leverage can arise when the economy is in the euphoric phase as firms expect higher profit and take more debt to invest which creates financial fragility and an economic bubble endogenously.


The study of firms’ financial position can affect growth and level of investment of fixed capital in the post-Keynesian framework is done by Lang et al (2021), Daferemos (2017), Nikolaidi (2014), Lavoie (2014), Ryoo (2013), Nishi (2012), van Treeck (2008), and Taylor (2004). This model specifies that firms are vigilant about their leverage ratio (debt to capital ratio) and always take countercyclical leverage on their investment equation at the microeconomics level. I investigate when firms in nature are always attempting to control their leverage under a certain level, and how at the macroeconomics level firms’ procyclical leverage on demand and growth arises. To show a more simple dynamic analysis, this model sets a fixed benchmark target leverage ratio to see how firms control their balance sheet at a certain level (deleverage) effects on overall effective demand and macroeconomic growth. I expand Minsky’s pro-cyclical business debt dynamics capturing various debt cycles based on the different levels of firms' propensity to save or retention rate. By doing so, I identify there is mainly two debt dynamic either Minsky or Steindl type. Also, theoretically, I examine the applicability of the model to different modern capitalistic economies to complement the financialization literature by showing the different types of financialization paths. Japanese financialized capitalism differs from Anglo-American capitalism in some key ways; a debt-burdened economy dominated the growth pattern and a rise in the debt ratio restrains capital accumulation. This paper attempts to explain the importance of the level of retention rate which is a proxy of the level of financialization and development of a financialized macroeconomy. By analyzing the outcome of the model by different levels of retention rates, we can incorporate comparative political economy analysis for the two different non-linear outcomes of debt and capital. More importantly, I show the development of financialization can take different paths depending on the type of institution and organization and path dependency.


This paper uses the neo-Kaleckian stock-flow consistent model to show the nonlinear dynamics of debt, and capital and their implication for macroeconomic growth and secular stagnation. The novelty of this paper is to identify what makes the economy emerge as debt-led or debt-burdened is from a parameter that related to the state of capitalism and more political economy factor. Most importantly, this paper identifies the retention rate of firms as the leading factor that creates different nonlinear dynamics of debt and capital. Various papers explain the stagnation pattern in an economy with firms' low retention rates through the discourse of shareholder-oriented capitalism. However, there is not enough discussion of firms’ low retention rates and their macroeconomic implication. This paper using the comparative political economy analysis sheds light on the economy with a high retention rate of firms that could also conduce secular stagnation as firms' investment is sluggish significantly due to the paradox of debt.


First, this paper models US and UK capitalism represented by the Miskyan cycle which firms with low retention rates in which firms would distribute their profit to shareholders for short-term profit-seeking purposes from the higher share price. In shareholder-oriented capitalism this paper shows a higher return on dividends leads to a higher share price is the driver of the economic cycle in addition to higher consumption out of wealth from a certain top-income group of households, called rentiers. In my Minskyan shareholder-oriented economic regime, the outcome is the demand from the financial profit increases but the extremely high debt-to-capital ratio of the firm could destabilize the economy which questions the sustainability of the economy.

Second, this paper attempts to model the Japanese capitalism represented by the Steindl cycle as firms motivated to lower the leverage ratio to fix the balance sheet and set higher retention rates to use their cash flow to pay off the debt. Normally, the higher retention rate is supposed to be a better distributional outcome as firms use their profit to finance investment and higher demand leads to higher disposable income. However we find that as firms would instead use the profit to hold as cash or use to pay off the debt, the profit which is supposed to be distributed through investment to households as disposable income gets attenuated, and that creates a permanently low capacity utilization rate and aggregate demand. Also, firms pay off the debt using the profit, which leads paradoxically to their leverage ratio to a higher level permanently, and this phenomenon represents the paradox of debt and its stagnation regime (Steindl debt-burdened regime). Both debt-led growth and debt-burdened growth in the financialized capitalism for both U.S. and Japanese economies can demonstrate the dumping effect of production investment and secular stagnation.

Third, this paper reveals that sufficiently high retention rates of firms can also induce instability. As retention rate can create unique distributional aspects. As a low retention rate creates higher dividend income that is distributed to households, and more realistically shareholders or investors, high retention rates can cause the profit of firms would not be distributed as income to households when firms rather use their profit to pay off debt instead investment finance purposes. This creates low demand from households and creates instability from high firms deleveraging and saving behaviour.

Fourth, this paper finds in the paradox of debt and debt-burdened regime, economic stagnation can be transformed into stable cyclical growth when the autonomous investment level is sufficiently high. In the Mysnkian model, the counter-cyclical fiscal rule is the stabilizing factor of the output level. The contribution of this research is to find that higher animal spirits of firms or government fiscal policy that induces higher capital investment are conducive to stabilizing the economy, especially in the Steindl paradox of debt regime (high retention rate of firms).

As a final remark, the study of cyclical growth or the longwave that features the nature of the contemporary financially fragile capitalist economy which is evolving through stages is often used in the institutional post-Keynesian study (Setterfield, 2011). Indeed the Steindl limit cycle we have shown is more like a long wage which is affected by the change in the institutional aspect such as non-financial firms’ saving rate and animal spirits. Japanese type of partially fledged capitalism is modelled by the clockwise Steindl cycle signifies that is unique and different from the finance-dominated capitalist economy. In the latter type of case, firms as an institution have high caution of balance sheet instability possibly due to the trauma from the past economic crisis and this past dependent deleveraging are more subjected to secular stagnation. Despite the fact that it is quite a simplistic approach to explain the different types of capitalism using the long wave cycle or what Palley (2011) calls the ‘super cycle’ in this way, we can reconcile the post-Keynesian business cycle-oriented analysis of the economics fluctuation with mode deeper political economy analysis emphasizing on the role of institutions infrastructure of the accumulation process or hysteresis (Setterfield, 2011; Palley, 2011; Boyer 2005).


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