A Minsky moment is coming?

“Minsky Moment” refers to the onset of a market collapse brought on by the reckless speculative activity that defines an unsustainable bullish period. A “Minsky moment is when the fecal matter finally hits the fan.”

American economist Hyman Minsky, who died in 1996, said that during good times, corporations borrow too much and when the cycle turns negative, the financial system goes from stability to fragility, followed by crisis and crash. Most economists in the Keynesian tradition knew this theory and supported some government intervention in financial markets.

The problem started when the global system completely abandoned an asset back currency—and therefore asset-backed economy—in favor of a debt-based economy. “He offered very good insights in the ’60s and ’70s when linkages between the financial markets and the economy were not as well understood as they are now.”—Henry Kaufman, Wall Street money manager.

Minsky’s system categorized three stages of monetary evolution from what he called “hedge finance” to “speculative finance” and finally to “Ponzi finance,” with each stage requiring more and more credit to support acceptable corporate growth. But because he created his concept prior to 1972, and the end of the Bretton Woods System, Minsky never envisioned that it would be governments borrowing too much to support the GDP. The result has been what we see today with total “government Ponzi Debt” and Ponzi Debt Economies. Old debt must be paid off with new and larger debt. Economies can only grow on the back of the new debt, not an increase in production.

But note clearly, it was countries like the Philippines that operated under this system in the 1970s and early 1980s and provided speculative lending activity for the banks. In the 2000s, the only nations/governments (and their corporate sponsors) that can do this are the big boys and that is why the world financial system took a huge debt dump in 2007.

All the consumer housing loans that collapsed were because of speculative and finally “Ponzi loans” to consumers by the banks because governments gave financial incentives so that people could buy one or more houses and then vote for the “right” politician.

Hear this. “Ponzi Debt Economies” have led to “Ponzi Geopolitics.” For example: World War 2 was not a good idea. But controlled war in general is both financially and politically profitable. Besides, none of the US, Europe, Russia, or China can afford to defeat “the enemy.” It’s too expensive to win plus all need an enemy to blame for problems when things are tough and go for mutual profit when times are good.

No US politician made much of a fuss about the trade deficit with China as long as they were buying US government debt and providing
low-cost consumer goods. But eventually the Ponzi economic benefits of that trade collapsed.

With the poor condition of the global economy, we need a war and maybe more than one. But this time both Russia and China are playing for real, and the US/Europe is playing a game. May 20, 2022: “Blinken accuses Russia of using food as a weapon in Ukraine.” August 5, 2022: “Blinken: China’s Actions Around Taiwan Unjustified, Disproportionate and Provocative.”

Apparently Blinken grew up playing Tongits or Monopoly with family members that always let him win because he was so cute.

We are potentially looking down the barrel of a geopolitical “Minsky Moment.” All Minsky moments are preceded by a build up of pressure that finally snaps. The Lehman Brothers bankruptcy followed months of increasing bad loans. The “moment” came with the bankruptcy on September 15, 2008 and the Dow Jones closing down 4.4 percent starting the market collapse.

However, all this was triggered by a sleight of hand move by Lehman in shunting billions of bad loans to a friendly special-purpose finance company Hudson Castle “in order to pretty up its books.”

While the world is looking at China taking advantage of the Ukraine war, it’s North Korea that is making equally big moves with China’s blessing. North Korean escalation with increased missile tests to pressure the US to make concessions—troop withdrawals from South Korea—would play directly into the hands of China, enabling it to replace the US and establish itself as the primary power in the region.

The danger with a Minsky Moment is that the system fails, collapses, and then there is a very painful reboot.

E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.