INVERSION EXPLAINED: What you need to know about the Minsky Moment
In this series, we break down the jargon and explain a popular investment term or topic. Here is the Minsky Moment.
What the hell is this?
The late American economist Hyman Minsky argued that stability in financial markets eventually leads to extreme instability.
Private and institutional investors become complacent and take on more debt, until they are unable to repay these loans out of their income and have to sell even their least speculative holdings. This demand for cash drives down stock prices, leading to the bursting of the bubble.
Minsky expounded his thesis in the 1993 article The Financial Instability Hypothesis, but the phrase “Minsky moment” was coined during the 1998 Russian debt crisis by Paul McCulley, chief economist at fund management group Pimco.
When was the term widely used?
In 2007, when the subprime mortgage scandal broke out in the United States, triggering the global financial crisis. Bankers, brokers and columnists began to make extensive use of the ‘Minsky Moment’ when trying to explain market turmoil.
Instability: Private and institutional investors become complacent and take on more debt, until they are unable to repay these loans.
Minsky, who died in 1996, was a shadowy figure in his lifetime. But the global financial crisis made him posthumously famous. The Economist magazine even argues that the Minsky Moment has become synonymous with financial crisis.
Why do we listen to it now?
People wonder if China may be close to a Minsky Moment after skyrocketing debt, particularly in real estate.
Growth is slowing in all sectors and there is said to be a “temperature difference” between the official figures and the actual situation.
Inflation may be a problem in the UK, US and elsewhere, but there are signs of deflationary pressures in China.
What has gone wrong in the real estate sector?
Residential developers have been hit by lending restrictions, lower home prices and sluggish demand. Evergrande is struggling with debts of more than $300 billion on which it has paid no interest.
Country Garden has also defaulted on interest payments. These issues are one of the reasons asset manager giant Zhongrong has been unable to pay its clients interest or proceeds from investment maturities. Zhongrong is part of China’s shadow banking sector, which provides financing to developers in a strategy that provided extraordinary returns when property values were rising.
Is China worried?
In 2019, former Bank of China Governor Zhou Xiaochuan warned that the mountain of debt threatened a Minsky Moment. But it is not known if this term from the decadent West was heard during the planning of the measures adopted last week by the Beijing regime.
These include a cut in interest rates and a reduction in the tax on operations in the stock market to revive the market. However, investors want more, starting with a massive public spending program.
What would Minsky have said?
Minsky’s thesis concerned the trajectory of events in capitalist economies with mature financial systems. It is not clear if his thinking applies to socialist states moving towards a market economy.
But he probably would have thought that China’s problems posed a global threat, since it is the world’s second-biggest economy.
