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Debt and Financial Sentiment: Early Keynes on Balance Sheet Effects of Asset Price Changes

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  • Korkut Alp Ertürk
  • Jake Jennings

Abstract

The paper explores the link between financial sentiment and private debt, using Keynes’s ‘A Treatise on Money’ as a conceptual backdrop. In responding to his critics after the publication of his ‘General Theory’ Keynes famously talked about unexpected, violent changes in conventional asset valuations resulting from doubts with a life of their own boiling over onto the surface. Such doubts he argued influenced the size of what he called the ‘bear position’, which in his ‘Treatise on Money’ he took to be an index of financial sentiment. Minsky also drew from Keynes’s earlier work when he famously argued that optimistic future expectations raise asset prices, creating a margin that enables firms to access finance in the present. However, neither asset price speculation nor shifting financial sentiment over the business cycle received in his work the kind of attention they did in Keynes’s ‘Treatise’. The focus of this paper is what Minsky left unexplored on financial sentiment and the balance sheet effects of asset price changes in the ‘Treatise’, which sheds light on when private debt can become excessive. The central insight is that financial sentiment begins to diverge when economic performance unexpectedly falls short, raising doubts that current asset prices are ‘excessive’. While the economy might be ‘debtled’ when financial sentiment is strong it tends to become ‘debt-burdened’ as sentiment weakens. Das Papier untersucht den Zusammenhang zwischen finanzieller Stimmung und privater Verschuldung und verwendet Keynes’ ‚A Treatise on Money‘ als konzeptionellen Hintergrund. In der Antwort auf seine Kritiker nach der Veröffentlichung seiner ‚General Theory‘ sprach Keynes bekanntlich von unerwarteten, gewaltigen Veränderungen bei der konventionellen Vermögensbewertung, wenn Zweifel an der Werthaltigkeit der Anlagen aufkommen. Solche Zweifel beeinflussten die Größe dessen, was er die Bärenposition nannte, die er in seiner ‚Treatise on Money‘ als Index der finanziellen Stimmung ansah. Auch Minsky schöpfte aus Keynes’ früherer Arbeit, als er bekanntlich argumentierte, dass optimistische Zukunftserwartungen die Vermögenspreise erhöhen und eine Marge schaffen, die es Unternehmen ermöglicht, in der Gegenwart Zugang zu Finanzierungsmitteln zu erhalten. Allerdings erhielten weder Vermögenspreisspekulationen noch ein Umschwung der finanziellen Stimmung über den Konjunkturzyklus in seiner Arbeit die Aufmerksamkeit, die sie in Keynes’ ‚Treatise‘ fanden. Der Schwerpunkt dieses Papiers liegt auf dem, was Minsky über die finanzielle Stimmung und die Bilanzwirkungen von Vermögenspreisänderungen in der ‚Treatise‘ unerforscht ließ, was Aufschluss darüber gibt, wann private Schulden übermäßig werden können. Die zentrale Erkenntnis ist, dass die finanzielle Stimmung zu kippen beginnt, wenn die Wirtschaftsleistung unerwartet niedrig ausfällt, was Bedenken aufkommen lässt, dass die aktuellen Vermögenspreise überhöht sind. Während die Wirtschaft durch Schulden vorangetrieben wird, wenn die finanzielle Stimmung hoch ist, neigt sie dazu, mit abnehmender Stimmung in die Überschuldung zu geraten.

Suggested Citation

  • Korkut Alp Ertürk & Jake Jennings, 2020. "Debt and Financial Sentiment: Early Keynes on Balance Sheet Effects of Asset Price Changes," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 89(1), pages 45-58.
  • Handle: RePEc:diw:diwvjh:89-1-4
    DOI: 10.3790/vjh.89.1.45
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    More about this item

    Keywords

    Speculation; credit; money supply; asset pricing;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics

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