8. A Catastrophe Theory of the Endogenous Cycle of Loanable Funds

The discussion of Minsky’s theory reaches up to the macro-level to expose the full effect of the credit phases and the possibility of the catastrophic moment, triggered by changing perceptions of risk and uncertainty. This leads to the modelling exposition in the form of the catastrophe framework of thought, where a number of multiple equilibrium paths can be taken by the financial sector, driving business (or residential) cycles with either inflationary or deflationary tendencies. This links to the deposit base embodied in the components of the money multiplier, which is driven by the mechanism of credit creation (or extinction) of loans. The variability of the deposit base is largely dependent on the state of the economy in terms of the cyclical growth of GDP, intertwined with the financial cycle of the multiple equilibria.