Watch For The Minsky Moment

Has the great American spending crisis already begun?

GEORGE NOGA

Feb 4, 2024

I have been writing frequently about the spending crisis because it is inevitable and fundamentally will transform these United States in ways difficult to imagine. It will be like the Great Depression in that Americans will forever date everything from before or after the crisis. This post addresses whether or not the crisis has begun.

The crisis could begin suddenly when the market for Treasury securities evaporates and buyers no longer are willing to buy government debt under acceptable terms. It could be triggered by an unexpected downgrade of US government debt by one of the rating agencies. Or it may be triggered by a seemingly innocuous event such as a Bloomberg article that goes viral and results in panic selling of Treasury bonds.

Alternatively, the crisis could begin slowly and gradually. Although there would be abundant signs, they would be ignored or lost in mountains of data. Inevitably, there also would be conflicting signs. No bell will ring when the crisis begins.

The Minsky Moment

The Minsky Moment, named for economist Hyman Minsky, is that precise tipping point when unsustainable activity results in a sudden decline in market sentiment and leads to panic selling and to a rapid and unpreventable market collapse. It is an abrupt bursting of a bubble. It is an unmistakable demarcation such that nothing is the same after the Minsky Moment as it was before. A recent example of a Minsky Moment is the 2008 bankruptcy of Lehman Brothers which burst the housing bubble.

Whether the spending crisis begins suddenly or gradually, there will come a Minsky Moment. Once it occurs, it will be too late to protect your assets.

Has the Spending Crisis Begun?

Although the Minsky Moment for the spending crisis has not yet occurred, that does not mean the crisis has not begun. As noted supra, the crisis could begin gradually, with the Minsky Moment coming later. Following are some indicia that suggest the crisis already may have started.

• Moody’s, a major credit rating agency, recently put US Treasury securities on “negative credit watch”, which means a downgrade may be imminent. Recall that Treasury debt already has been downgraded once before.
• Demand at recent auctions of Treasury debt has been tepid; in November, the Treasury was unable to sell all the bonds it offered due to insufficient demand.
• A recent headline in the WSJ blared “Foreigners Lose Interest in Buying US Treasury Debt”. Foreign ownership of Treasuries is down 35% in recent years.
• Demand for longer-dated Treasuries (the most risky) has been so weak that Treasury was forced to shift to offering more shorter-duration debt instead.
• Interest on the debt last FY was 16% of revenue; this FY it will balloon to 22% of revenue on its way to oblivion. What happens when 25%, 33% or 50% of all government revenue must be used to pay interest on the debt?
• There has been a geometric increase in the number of news reports about the debt spiral in recent months. Search “Minsky Moment” online.

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What is the Key Takeaway?

The key takeaway from all this is that the time will come (sooner rather than later) when America will be forced to cut spending by at least $1 trillion in today’s dollars. If we don’t drastically cut spending voluntarily, the market will do it for us. The most likely scenario is as follows:

• The US will continue present spending levels. There will be occasional sops to cut spending but they will be inconsequential political window dressing.
• Both the debt ratio and the share of revenue required to service debt will continue to skyrocket, reaching obscene levels.
• The Minsky Moment likely will come when either: (1) the market for government debt implodes; (2) Treasuries are downgraded to near junk levels; or (3) some highly credible person or organization says the jig is up.
• At first, the Fed will print money to sustain the obscene spending, but that will result in hyperinflation.
• With absolutely no other choices remaining, spending will be slashed, including cuts of 30% to Social Security, Medicare, Medicaid and all other government programs. Also new taxes such as a VAT and/or carbon tax will be enacted.
• America will be forever transformed and we will experience a lost generation.

Who will be the last person on Earth to buy US government debt? Watch for the Minsky Moment and remember that if something cannot go on forever, it won’t!