Minsky\u27s Financial Instability Hypothesis has not come without its fair share of criticism. Much ado about Minsky\u27s endogenous business cycle theory stems from a model where boom-time profit opportunities indelibly encourage firms to finance investment by leveraging their fixed capital assets against their internal liquidity. Opposition to Minsky often points to two distinct circumstances that might discourage the external finance of investment: a rise in effective demand and increasing risk. A rise in effective demand can increase the retained earnings of a firm providing more capital to internally finance investment and investment financed from retained earning is less risky than investment financed with debt. This has fueled criticism of Minsky\u27s framework as having controversial assumptions that discourage rather than encourage financial instability.
This paper examines Minsky\u27s Financial Instability Hypothesis from a savings and debt point of view in order to determine whether or not Minsky\u27s financial crisis theory holds up to its critics. It looks at the peculiar role of foreign savings in creating an incentive for financialization and how that engenders financial instability. Moreover, I hope to display a theoretical argument that unifies much of the criticism of Minsky with the valuable contributions he has made to economic theory
