Kalecki’s principle of increasing risk violated: debt, cash flow and free cash

Abstract

The recent expansion of leverage among the largest U.S. nonfinancial firms violates Michal Kalecki’s “Principle of Increasing Risk” in the sense that the largest firms are more leveraged than their smaller counterparts. The thesis presented herein is that this violation is critically dependent on cash and free cash flows derived from public and noncorporate private deficit spending outside of the corporate sector. In reference to public deficits, this dependency was first elaborated in Hyman Minsky’s elaboration of Kalecki’s derivation of free cash. Arguably, noncorporate private debt relative to personal income—based mainly on household deficit spending—has approached an upper limit. Arrival at such a limit would mean that corporate leverage in the nonfinancial sector would be dependent on public deficits alone. Under present circumstances, this means a continued dependency on the hegemonic role of the dollar in world markets and the continued willingness of foreigners to absorb U.S. public debt.