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Is a Minsky Moment at Hand?

ILLUSTRATION: Tom Bachtell/The New Yorker

I am not terribly interested in delving into the economic-financial theories of Hyman Minsky (1919 –1996). Like most of the overrated tribe economists who dominate thinking, he was a fanboy of the Federal Reserve and saw it as the key to stabilizing the economic system with “wise interventions.” Naive Minsky (like others) seemed to believe that Alan, Ben, Janet and Jerome could get their fellow banksters on the phone and use ‘suasion” and “policy tweaks” to talk the cowboyz, and riverboat gamblers with other people’s money, off of high ledges.

In fairness, Minsky didn’t live long enough to see his beloved Fed deliberately enabling and abetting out-of-control, criminal, wildcat finance and fueling three significant bubbles in the 21st century. And who cares about muh man Andrew Jackson’s views in the current year?

That said, Minsky did offer a useful Financial Instability Hypothesis. In a nutshell, “investors” naturally take actions that expand the high and low points of cycles. He wrote:

“Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows … Speculative finance units are units that can meet their payment commitments on “income account” on their liabilities, even as they cannot repay the principle out of income cash flows … For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations.”

In other words, lending and investing standards recede to levels that guarantee a failure or fault slip, generally called the “Minsky Moment.” The irony is that it is distortions not “good times” as many of the Minsky Ponzi units are now held in the portfolios of Minsky’s beloved central banks.

While writing and doing podcasts about the economy before the 2008-2009 financial crisis, I was constantly alluding to Ponzi units, fictitious capital, and the Minsky Moment, which ultimately arrived.

Therefore, imagine my shock when I saw the following chart from Bianco Research. It shows the percentage of companies in the S&P 500 that would fall into Minsky’s “Ponzi unit” category. Specifically, it defines these “zombies” as companies with interest expenses that are greater than their three-year average EBIT (earnings before interest and taxes). And that’s in an ultra-low interest-rate environment.

The current situation makes 1998-2001 and 2006-2009 look like piker eras! Read ’em and weep. In hindsight, the Ponzi units of the 2008 crash were more concentrated with certain notorious financial wild men and criminals, who nearly brought the system down. Now, Hyman Minsky would be having a moment, rolling over in his grave. Thus, rather than cooling off speculative Ponzi excess, the central banks have doubled down and amplified it. Minsky defined it thusly: “The greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system.”

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