Debt Is Sowing the Seeds of the Next Crisis

The Minsky Model


That innocuous surname has become my one-word rebuttal whenever someone suggests that we need not worry about financial markets.

It may be shorthand … but to those in the know, it’s terrifying.

It’s meant to be.

To me, “Minsky” is a reminder that long stretches of prosperity — such as the one we’ve been in since 2009 — sow the seeds of the next crisis.

Hyman Minsky — “an owlish man with a shock of gray hair,” as The Economist describes him — proposed what he called the “financial instability hypothesis.”


Minsky’s hypothesis did something most mainstream economists don’t do: He included empirical evidence of human nature in his model.

By contrast, his peers — and policymakers — relied almost entirely on abstract models. And they thought the structure of the financial system was irrelevant.

Minsky argued that this was bunkum. In the real world, the level and type of debt in the economy drives major economic cycles. We ignore it at our peril.

Post-2008, economists have started to use the term “Minsky moment” to describe when credit markets begin to deleverage after an extended period of rising debt levels.

Knowing when a Minsky moment is in the horizon is critical … especially if you’re near or in retirement…

The Minsky Model

Minsky distinguished between three kinds of financing.

  • The first is when households and firms rely on future cash flows to repay borrowings. It works fine as long as they have a manageable debt load and a steady income.
  • The second financing strategy is riskier. Households and firms rely on cash flow to repay interest but must roll over their principal debt into new loans. Minsky called this “speculative” financing.
  • Minsky’s third type of financing — which he called “Ponzi financing” — is the most dangerous. Cash flow covers neither principal nor interest. Households and firms bet that the value of their assets will appreciate by enough to cover their liabilities.

Economies with strong cash flows and low debt levels are stable. But economies based on speculative and, especially, Ponzi finance are vulnerable to sudden collapses.

If asset values start to fall, either because of monetary tightening or some external shock, overindebted households and firms are forced to liquidate their positions. This burst of selling further undermines asset values, making things worse. Things spiral out of control.

That’s a Minsky moment — like 2008, for example.

Obviously, the way to avoid Minsky moments is to stick to safe and sustainable financing.

But when the economy is humming, and interest rates are low, the temptation to take on debt is irresistible.

Households borrow. Firms borrow to repurchase shares, since that’s a quicker way to boost share values than actual investment. Obliging banks lower their credit standards as the boom period unfolds.

Debt levels grow to speculative and Ponzi levels. Boom becomes bust.

Minsky’s conclusion was that economic stability breeds instability. Periods of prosperity create financial fragility.

Everything is fine until it’s not.

How Minsky Are We?

Let’s look at some indicators of debt.

First, global debt, including public, private and corporate debt, has increased substantially since 2007. The main drivers are the U.S. and, especially, China:

The Minsky Model

Within that global debt, nonfinancial corporate debt grew by 15% from 2011 to 2017 — from 81% to 96% of global gross domestic product (GDP). The total debt burden of all global firms is now almost equal to the world’s annual economic output.

Moreover, the proportion of highly leveraged firms — those whose debt-to-earnings ratio exceeds 5 — was 37% in 2017, compared to 32% just before the global financial crisis.

Within the U.S., unsecured consumer debt has increased substantially since 2007, driven mainly by student debt. But total credit card debt today is about where it was then (red line below):

The Minsky Model

After declining until 2013, U.S. commercial and residential mortgage debt outstanding has resumed its steady march upward:

The Minsky Model

During the same time frame — roughly starting in 2013 — U.S. consumer debt repayment as a percentage of disposable income grew from under 5% to almost 6% today:

The Minsky Model

But here’s the one that worries me: Margin debt on brokerage accounts.

Margin debt is the mousetrap of the U.S. economy. It springs into action quickly, when equity values decline, and brokers call it in. Forced selling leads to a mini-Minsky moment in the stock market as sellers outnumber buyers.

It tends to peak just before big collapses — like the dot-com bust and the 2008 crisis. Its upward run since 2008 is quite spectacular:

The Minsky Model

Keep a Weather Eye for the Minsky Moment

Sailors like me know to keep a “weather eye.” Merriam-Webster defines it as “1: An eye quick to observe coming changes in the weather. 2: Constant and shrewd watchfulness and alertness.”

That sounds like very good advice right about now. Low interest rates have encouraged a lot of borrowing around the world. Consumers, firms and governments have taken advantage of these rates to try to recover ground lost since 2008.

But even though we’re in a so-called “coordinated global upswing,” forecast global GDP growth is still in the 2.5% to 2.8% range. That’s just not enough to generate the real economic income needed to pay down the gobs of debt hanging off the global economy — especially the two biggest players, the U.S. and China.

My advice: Enjoy the good times! But keep a good weather eye out for the next Minsky moment. And in the meantime, explore the many ways you can protect your wealth — before it comes.

Kind regards,

Ted Bauman

Editor, The Bauman Letter

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  • Michael Mallal

    I though it was Kondratieff who drew the nexus between debt and financial collapse.

  • Everyone sees the debt bomb in plain sight so the next crisis usually manifests itself in something the masses do not see coming. If the Fed holds firm and not rolls over $20 billion a month, as in January, it would seem that late February and March will be the tell tale of truly whether the “growth” momentum priced into the stock market can absorb the rising yields on treasuries especially if the demand is weak. Since most managed futures funds are negative YTD, where is the trend to follow?

  • Mike

    For the love of Pete, Ted, you are trying to rewrite financial and economic history. First of all the problems we now face began in 1982 with the election of the “Actor” Ronald Reagan, when he gave HUGE tax breaks to his donors, but failed to cut spending (He actually incressed spending). Those acts caused the defict to begin to climb at a rate not seen since WW-ll.. Then through GOP legislation the Middle Class jobs got shipped overseas and the average citizen had less to spend.

    That behavior kept going as one GOP Administration after another with GOP majorities in Congress screwed more and more of the Middle Class. Then came the GOP led Liar loans, (which removed the Inner City Restrictions) at the behest of the American Bankers, which made them billlions and set up the housing crash. On top of that came the GOP majority Congress removal of Glass-Steagall in 1999, and we had the repeat of the run up to1929 as the same types of speculation were suddenly allowed to run wild bringing 1929 all over again during Cheney/bush from 2007-2009!

    Real history has shown us that GOP Administrations and GOP Majority Congresses breed Stock Market Crashes and Financial Failures (1929 and 2007). And Democrat Administrations and Democrat Majority Conresses repair that financial damage and get America back on track (1932 and 2009).

    Bottom line, we again have a GOP President and a GOP Majority Congress. Real history has taught us that this is a time to prepare for the worst until the American voters respond, once again, and send them packing just as they did in 1932 and 2009….

  • Jake

    Mike, I didn’t realize this was a political discussion, I thought it was about unsustainable debt loads and the negative consequences they bring. If your response is “cliff notes” to the article you would receive a resounding F.

  • Mr. IMF and the Mystery of the Thirsty Swans (13:18) ANIMATED
    Why the design of banking is, itself, the root cause of money system instability.
    Inspired by a conversation with a senior economist and central banker
    who has worked at the highest levels of the IMF, and consulted for the World Bank and the Federal Reserve.
    All based of published facts provided by the Bank of England and the Fed.

  • Mike

    You missed my point. Do you work for the RNC? He is saying the “Sky is about to fall”, but failing to addres how it happened… I’m pointing out how the problem has occurred again and again and how to fix it. His charts are off by about 20 years as 1982 is when the problem began with the “Republican Revolution”. Oh ya, and it has happened in a cyclic repeat every time the Conservatives have ruled for a while in all of America’s history. Ever study economic cycles?

  • Jake

    I’m not going to dignify your question about the RNC…. you obviously are a democrat but this is not about changing your mind. Reagan came into office following lackluster growth under jimmy carter. The country voted him in under a landslide win to provide stimulus. Yes he cut taxes and spent, this is what the ELECTORATE wanted including crossover dems. Eight years of Reagan and four under Bush we got Clinton. I didn’t have significant issues with Clinton but he did get the ball rolling on the housing crisis “with the expansion of HUD loans revising down payments from 20% to 3% in credit risk neighborhoods and requiring banks to expand their footprints in these communities. When Bush took over spending continued, however, treasury secretary John Snow testified in front of congress that Fannie and Freddie Mac had issues due to lax regs. Barnie Franks disagreed and over lending continued. Obama gets in during the crisis period and NEEDED TO SPEND his way out of a monumental breakdown. So Mike it was not just republicans, it was both parties. I think they are equally driven to get reeelected and don’t give a damn about any of us!

  • Mike

    Right in line with RNC Talking Points… And Incorrect…

    FACTS: Stock Markett Crashes and Financial Panics:

    1929-1932: Republican Hoover and a Republican Majority Congress after a long period of Republican **********: 90-% Loss..

    2007-2009: Republicans Cheney/bush and a Republican Majoroity Ccongress after a long period of Reepublican **********: 60% Loss

    Ends of Stock Market Crashes and Economic Recoveries:

    1932: FDR and a Democratic Majority Congress

    2009: Obama and a Democratic Majority Congress

  • Jake

    do you always identify everybody? am I a sis-gender Male with white supremacy tendencies with a fringe of empathy? Geez Mike give it a rest
    When given video of what was said you still deny.

    Anyways here you go

  • Jake

    Did you even read what I wrote Mike? Or did you see the response was from “Jake” and your eyes got red, your fist clenched and you ground your teeth. My god man, I wrote nothing close to “talking Points” you can look it all up on line on the World Wide Web designed by Al Gore.

  • Mike

    Ya, like Forbes is going to give us an “Unbiased View”? The Rally from 1982 was brought by Paul Volker (appointed by Carter). Genius Reagan appoints “Mumbles Greenspan” who saw “No Problem” with the removal of the Glass-Stegall Act which had kept the makets stable since it was brought by the Democrates and FDR (after the Pecora Hearings left no doubt as to the casues of 1929)…. And, BINGO, within seven years we have 1929 again, under Cheney/bush. And in 2009, another Democrat called Obama and a Demcrat Majority Congress does what FDR did in 1932….

    Did you also know that from 1929 until 2014 the Stock Market did over 400 times better under Democrat Presidents than Republican despite about the same number of each type of Administrations? Forbes did not carry that Study, but the New York Times and the Huffington Post did? Look it up if you want to know the truth.

    Now we have a Republican President, Republican Majority Congress and a Republican appointed Fed Chair. Know what the odds of a Financial Disaster are?

    Good luck j with that White Male Superority Problem…… Beginning about 5 years ago, more women both white and colored entered Medical and Law Schools across the country and last year more of those women graduated than white men…… Damn that Civil Rights Act and those “Pinko Lefties, aye?!…. 🙂

    I’ll bet you hate the Civil Rights Act also?…. Geez

  • Jake

    Gosh Mikey you have an answer for everything that doesn’t fit your narrative dismiss Forbes because they are a right wing mag, pigeon hole me as a RNC talking points dude, and furthermore believe I am against the civil rights….. why don’t you just say what you think directly and tell me to STFU.. BTW what party freed the African Americans? Oh yeah republicans. Who was the party of the KKK, Democrats. Anyways Mikey, our government is not in the business of the Stock Market, just so ya know

  • Mike

    Just trying to educate you “Jakey”. Check out what I’ve told you if you want to know the truth or keep following the RNC and FAUX crap and wonder why your investments aren’t doing so well. If you want to look back beyond the last 100 years, try using the words Conservative and Liberal Progressive. Last century, the Conservatives were called Democrats and many were KKK…. Incidentally, Lincoln was NOT a Conservative. Just another lie coming from the “Party of Lincoln”…. Oh those fibbing Conservatives!… 🙁 Now I’m done with you Jakey…. Again try educating yourself if you expect to do well out there, aye?

  • Jake

    Ahhh your arrogance has permeated this entire conversation and now you need to educate me…. or indoctrinate me Heil Hitler mein Kompf

  • Jake

    final missive for you Mikey. From

    “During the 1860s, Republicans, who dominated northern states, orchestrated an ambitious expansion of federal power, helping to fund the transcontinental railroad, the state university system and the settlement of the West by homesteaders, and instating a national currency and protective tariff. Democrats, who dominated the South, opposed these measures. After the Civil War, Republicans passed laws that granted protections for African Americans and advanced social justice; again, Democrats largely opposed these expansions of power.”

    I seem to remember that “The North” which as stated above lived in the NORTH, was behind the movement to “free” the slaves. But I am certain you will claim that Livescience is a shill for the RNC and that the entire history of the USA has been hijacked by the RNC. Take care with your rose colored glasses

  • Mike

    1900-2018: Republicans/Conservatives and Democrates/Liberal Progressives
    1800: Republicans/Liberal Progressives and Democrates/Conservatives
    You’d have learned that in college….

  • Jake

    Geez Mike, I know you are a smart man, but this comment has got to be a quick thought……so you are telling me your professor in college told you that Republicans and Democrats switched their party strategies on January 1, 1900 after more than 100years? And you didn’t ask WHY? Seriously? Maybe it was the Democrats distancing themselves from religion over the past 100 years or before that, the democrats came out with the “NEW DEAL”, generating a nearly 85% switch of the Black vote or the 60’s with looser mores or none at all! Maybe that is why they call the right religious fanatics because they believe in “something” and many on the left abandoned religion. its a lot of things Mike and I know you know that but come on, a professor told me in college is your answer? Who believes a professor without question?

    Still don’t understand how it is one parties fault

  • Mike

    Try to get your head around this well excepted economic rule: As Income Inequity goes down, markets flourish and as income Inequity goes up, markets faulter. Under Liberal Progressive leadership Income Inequity goes down and the average American does better and under Conservative leadershio, Income Inequity goes up and the average American does worse… It really is that simple….