A Global Minsky Moment Ahead
By John R. Taylor
Last night I participated in a discussion of John Mauldin and Jonathan Tepper’s new book, Code Red, where the talk was dominated by the mindset of today’s Central Bankers, which I would categorize in two ways. The first is that the answer to any problem is to throw money at it and the second is that the people and societies of the world are too weak, physically as well as mentally, to survive the rigors of economic cycles. We are all children to them who need to be protected from the realities of the harsh world. Despite the vast majority decrying the folly of the money printing way of life, almost everyone accepted this was what the future would look like. Summing it up was a quote from Larry Lindsay saying that if $1 trillion per annum was not enough to forestall a recession, “just raise it to $2 trillion.” Don’t people remember that debt, once taken on, must be repaid? The conclusion seemed to be that inflation was ahead – eventually – and buy things that do well in inflation. I can’t agree. Debt repudiation is possibly more likely, but then again that might come after an inflation scare. In any case, it’s all a guess. Remember, what will happen next has never happened before.
Don’t think the US is the only one approaching crisis because of its increasing debt burden. Although the US might be the epicenter because the dollar is the world’s currency, this problem is worse in Europe, Japan and China. Remember John Connally who said “The dollar is our currency, but your problem,” he was prophetic. The flood of dollars since its floating in 1973 has been the major factor in the growth of debt levels world-wide. But individual economies are more or less able to handle the increasing availability of debt capital. Those slow-growing economies with large public sectors were the least able to recycle the money into profitable end uses and growth. As a result they were the first to enter the Ponzi stage of the Minsky cycle where new borrowings were taken just to pay the interest on the old ones. The further into the Minsky cycle one goes, the harder it is to generate positive growth until it is impossible. Europe is ahead of the US and is already suffering from a slow-motion economic and social collapse. The debt load of the sovereigns, the corporates and the public is still expanding as the continent’s balance sheet recession deepens. As there is no way to generate positive economic statistics, it seems deflation and debt repudiation is the likely course of events. In Asia, the Japanese seem to have made a decision similar to the US, as they are moving their debt purchases further out the curve, promising to buy for the long-term, and are pushing their currency lower to stimulate inflation, export growth, and jobs. In each, the growth of national debt levels is far outpacing the economy in already way over-leveraged situations. As each strategy is different, the results, in currency valuations, interest rate levels, and near-term growth, should be too. China is a different case. As it has aggressively used credit to generate growth, we might be worried about its over-leveraged position, but
the high level of economic expansion mitigates this issue dramatically especially when compared to the European periphery. However, as a Communist country that seems to be embracing its historical past more fervently, China is allowing its state-owned sector to borrow and expand without adding to profitable growth, and its new leaders might accelerate its economic decline.
By John R. Taylor
Last night I participated in a discussion of John Mauldin and Jonathan Tepper’s new book, Code Red, where the talk was dominated by the mindset of today’s Central Bankers, which I would categorize in two ways. The first is that the answer to any problem is to throw money at it and the second is that the people and societies of the world are too weak, physically as well as mentally, to survive the rigors of economic cycles. We are all children to them who need to be protected from the realities of the harsh world. Despite the vast majority decrying the folly of the money printing way of life, almost everyone accepted this was what the future would look like. Summing it up was a quote from Larry Lindsay saying that if $1 trillion per annum was not enough to forestall a recession, “just raise it to $2 trillion.” Don’t people remember that debt, once taken on, must be repaid? The conclusion seemed to be that inflation was ahead – eventually – and buy things that do well in inflation. I can’t agree. Debt repudiation is possibly more likely, but then again that might come after an inflation scare. In any case, it’s all a guess. Remember, what will happen next has never happened before.
Don’t think the US is the only one approaching crisis because of its increasing debt burden. Although the US might be the epicenter because the dollar is the world’s currency, this problem is worse in Europe, Japan and China. Remember John Connally who said “The dollar is our currency, but your problem,” he was prophetic. The flood of dollars since its floating in 1973 has been the major factor in the growth of debt levels world-wide. But individual economies are more or less able to handle the increasing availability of debt capital. Those slow-growing economies with large public sectors were the least able to recycle the money into profitable end uses and growth. As a result they were the first to enter the Ponzi stage of the Minsky cycle where new borrowings were taken just to pay the interest on the old ones. The further into the Minsky cycle one goes, the harder it is to generate positive growth until it is impossible. Europe is ahead of the US and is already suffering from a slow-motion economic and social collapse. The debt load of the sovereigns, the corporates and the public is still expanding as the continent’s balance sheet recession deepens. As there is no way to generate positive economic statistics, it seems deflation and debt repudiation is the likely course of events. In Asia, the Japanese seem to have made a decision similar to the US, as they are moving their debt purchases further out the curve, promising to buy for the long-term, and are pushing their currency lower to stimulate inflation, export growth, and jobs. In each, the growth of national debt levels is far outpacing the economy in already way over-leveraged situations. As each strategy is different, the results, in currency valuations, interest rate levels, and near-term growth, should be too. China is a different case. As it has aggressively used credit to generate growth, we might be worried about its over-leveraged position, but
the high level of economic expansion mitigates this issue dramatically especially when compared to the European periphery. However, as a Communist country that seems to be embracing its historical past more fervently, China is allowing its state-owned sector to borrow and expand without adding to profitable growth, and its new leaders might accelerate its economic decline.
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