About 19 or 20 years ago I was introduced to the works of Hyman Minsky. A basic tenant of his economic philosophy is stability leads to instability. His work focused on economies that are hooked on debt; excessive borrowings fuels financial instability. Minsky believes that change happens slowly, then suddenly.
An analogy used to explain such a phenomenon is a sand pile. At some juncture one more grain of sand will cause the pile to topple but the question is as to when.
Minsky argues that the longer period of stability the higher the potential risk and even greater instability.
The environment is exacerbated as everyone has employed the same strategies thus there is “no other side of the trade.”
The environment is further amplified by efforts by regulators and central bankers to prevent small losses that ultimately causes a conflagration.
Writing it differently, it is akin to today’s forest fires. For many years the government fought every small blaze or did not clear out the dead wood, thus providing fuel for the mammoth fires the country has experienced in years past.
The Father of Modern Monetary Theory (MMT) stated the government is spending like a “drunken sailor.” Those who adopt the MMT believe government can borrow without impunity as borrowings are done in the native currency.
If the father of MMT is calling for fiscal reform, the environment must be critical.
A major issue at hand is no one can accurately predict when a “Minsky Moment” will occur. The most insignificant event is typically the catalyst referencing the 1998 devaluation of the Thai Bot that destroyed Long Term Capital Management (LTCM) and threatened the entire integrity of the global financial system as example.
Neither candidate has addressed our fiscal issues, dismissing the warnings of FRB Chair Powell that current fiscal policy is unsustainable as a political hack.
Every political scientist has talked about an October Surprise. While I am not suggesting a Minsky Moment will occur in October, such would be the Mother of all October Surprises, radically impacting the campaigns of both candidates.
There are only two ways to overcome massive debt; restructuring or strong inflationary growth. Since the US is the world’s reserve currency and the global benchmark, restructuring is not an option.
Can an argument be made that today’s boomflation environment (strong inflationary growth) is the adopted strategy to overcome the country’s fiscal issues?
Both inflation and economic growth have defied expectations.
Yesterday’s news of a ban of Chinese software in EVs is a perfect example of the re onshoring of vital productive capacity from our adversaries, a basic tenant of the boomflation thesis.
All that is now needed is fiscal restraint; government stops excessively spending the country’s revenues. As noted many times, tax collections are at a record on both a percentage and absolute basis, but so is spending.
It is frightening to have $2 trillion annual deficits when the country is not at war, in a recession or facing some other externality such as pandemic.
OK enough of the fiscal rant, markets were quiet. Equities were essentially unchanged, parsing comments from Fed officials. Treasury yields were also unchanged.
What will happen today?
Last night the foreign markets were up. London was up 0.37%, Paris up 1.61% and Frankfurt up 0.74%. Chian was up 4.15%, Japan up 0.57% and Hang Seng up 4.13%.
Futures are flat. China unleashed a “massive” monetary stimulus measures to revive its economy, an economy that is still export dominated, defined as its economic growth is still largely dependent upon the health and the political environment of its trading partners. The 10-year is off 6/32 ot yield 3.65%.
