The Loanable Funds Cycle and the Variability of the Deposit Base

The re-evaluated assessment of this chapter lays the foundation for Minsky’s theory, which exposes the states of the economy through evolutionary time: expansion and significant progress, then downturn either in the form of recession with negative development (or growth recession) or full-blown depression with heightened uncertainty and risk that seems uncontrollable, which could be the case in the current pandemic crisis. At some stage in the future, the economy may go into recovery mode from Darwin’s “survival of the fittest” account of intense market competition, travelling back to the expansion stage with fresh consumption and investment opportunities to explore and exploit on account of Schumpeter’s process of creative destruction. This cycle has significant implications for the variability of the banking sector’s deposit base, which can be modelled within the later chapter ten, using the catastrophe framework to explain abrupt changes in money as loanable funds in relation to the build-up of uncertainty and default risk within the monetary economy. Clearly, the mark-up and the cycles of activity will affect the banks’ deposit base, which in turn determines their profit maximisation and the extent of their financing to individual consumers and firms with loans.