The Approach of America’s Minsky Moment: An Informative Analysis
The concept of a Minsky moment, named after American economist Hyman Minsky, refers to a financial crisis triggered by a sudden and systemic collapse in asset prices. This collapse typically occurs after a period of speculative investment, excessive borrowing, and widespread financial risk-taking. In other words, it’s the moment when the music stops playing, investors stop buying, and the Ponzi game comes to a crashing halt.
According to recent analysis, America may be on the brink of its own Minsky moment. This process, which moves from slow to sudden, has been building for decades. Following the global financial crisis of 2008-09, politicians, central bankers, and government officials deferred the necessary steps to put America’s economic house back in order to a later date when they would no longer be around. Instead of allowing over-leveraged banks and financial firms to fail and enduring short-term pain before moving forward, the U.S. government and the Federal Reserve chose to kick the can down the road by implementing massive money-supply expansion and unproductive government spending.
This playbook was again used in 2020 as a response to the pandemic, with the Congress engaging in a massive spending spree. However, these actions have only postponed the crisis and further inflated a massive bubble that is destined to burst. The evidence of this bubble can be seen in the all-time highs in equity and crypto markets, speculation in various asset classes, and excessive borrowing by governments, households, and corporations.
The magnitude of the debt problem has reached alarming levels, with the United States now among the top 10 most indebted countries in the world. The national debt is rapidly approaching $35 trillion, requiring over $1.1 trillion in annual interest payments just to service it. Moreover, this number doesn’t even include state and municipal debt or unfunded liabilities such as Medicare and Social Security. The deficit for 2024 is projected to be $1.7 trillion, adding to the existing cumulative U.S. deficit of $22 trillion since 2001. High deficits relative to GDP are strongly correlated with persistent inflation, which poses a significant concern.
Unlike the post-World War II era when deficits were reversed due to a productivity miracle, the United States of 2024 lacks a similar boost waiting in the wings. Although artificial intelligence shows promise, other industries such as crypto, energy, and mining are facing regulatory interference and relocating offshore. Manufacturing, which represents only 11 percent of GDP, is attempting a comeback but faces numerous barriers. The growth of financial advisors, personal injury attorneys, and tax accountants needed to navigate the complex IRS tax code hardly comprises the revolutionary army required to revive the American economy.
When the Minsky moment arrives, the U.S. government will have limited options to confront it, primarily resorting to quantitative easing and other forms of money printing. However, with bond markets in turmoil, investors will be reluctant to buy more U.S. debt. Foreign buyers have already begun reducing their exposure, accounting for only 30 percent of U.S. Treasurys held compared to 45 percent in 2013. If this divestment trend accelerates, the United States will have to monetize its debt through Federal Reserve purchases of U.S. Treasurys, which will lead to high inflation amid weakening economic conditions and rising unemployment.
The U.S. Department of the Treasury and the Federal Reserve have committed to a “whatever it takes” approach to crisis management. When the Minsky moment arrives and bond markets are in meltdown, this approach will primarily involve flooding the banking system with liquidity created out of thin air. Consequently, the United States will be forced to accept significantly higher levels of inflation as alternatives are deemed too severe. As the issuer of the world’s reserve currency, the U.S. government cannot default, and there is a practical limit on how high visible tax rates can go. Thus, the hidden tax of ever-higher inflation becomes the only alternative.
In order to avoid this outcome, U.S. productivity would have to undergo a dramatic increase to reduce the ratio of debt to GDP. However, this scenario seems highly unlikely. The higher the ratio of debt to GDP, the more it acts as an anchor-like drag on the national economic ship.
As America approaches its Minsky moment, the consequences of a financial crisis in 2024 or 2025 will be much worse than anything experienced during the 2008 crisis. The underlying conditions from the previous crisis were never truly resolved, and the current debt problem has only continued to grow. It is clear that significant changes need to be made to prevent a catastrophic outcome, but whether these changes will occur before it’s too late remains uncertain.
