Why We May Be Headed For Another “Minsky Moment”

Saturday, April 14, 2018
By Paul Martin

by Jesse Fedler via TheFedlerReport.com,
Sat, 04/14/2018

I recently ran across a terrific chart in Grant’s Interest Rate Observer that got me thinking about Hyman Minsky and The Financial Instability Hypothesis. After remaining relatively unknown during the course of his lifetime, Minsky really came to fame in the immediate aftermath of the financial crisis as his hypothesis helped to explain what left most economists baffled: the fundamental cause of the crisis.

Clearly, though, he has been forgotten just as quickly because, considering where we stand today, it’s obvious the economists with the greatest power to prevent another crisis have still not adopted his insights into their frameworks.

To begin to understand the current situation in Minsky terms we must first understand the hypothesis:

The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system. In particular, 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.

Next we need to understand what these financing units are:

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.

And this is what reminded me of Minsky when I read the recent article in Grant’s with the accompanying chart below. It shows the percent of companies in the S&P 500 that would fall into Minsky’s “Ponzi unit” category. Specifically, Bianco Research defines these “zombies” as companies whose interest expense is greater than their 3-year average EBIT (earnings before interest and taxes). Currently, we face the greatest percentage of “Ponzi units” in at least 20 years.

The Rest…HERE

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