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!

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© 2024 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

Update on the Crisis of Spending, Debt and Deficits
By: George Noga – September 20, 2014

By some metrics the debt storm has abated. Compared to earlier deficit projections published herein, the USA is slightly better off, with the difference due entirely to the massive Obama tax increases. The deficit this FY ending September 30 is $500 billion, equal to 3% of GDP; meanwhile GDP is increasing around 2%, meaning the deficit is growing only slightly faster than the economy, a marked improvement. However, great damage already has been done; moreover, we are merely in the eye of the debt hurricane – it may appear sunnier at the moment, but the deficit storm will soon resume with even more ferocity and we will all be blown away.

The Seen and the Unseen

The US economy already has sustained massive body blows. The reason we don’t clearly see the damage is due to the difference between the seen and unseen – or, more to the point, the difference between the reported and unreported.

In past recoveries following major recessions, the US economy has grown by an average of 5% for the subsequent 5 years; this results in a compound growth rate of 27.6%. Instead, we have experienced 2% compound growth yielding only 10.4%. The difference of 17.2% is the growth deficit. Simply, the average American today is 17% worse off than he/she should be; but we don’t see what should be; we only see what is. Nevertheless, the reality is that every American has been impoverished by 17% just during the past 5 years.
We see the increase in federal tax revenue and the concomitant reduction in the deficit. Unseen are the massive tax hikes that produced the revenue. Individual tax brackets increased with the top rate going to 39.6 % – a 13% increase. Investment related taxes were savaged with capital gains rates going from 15% to 23.8% (59% increase) and dividends from 15% to 43.4% (289% increase). Medicare taxes increased 62% and the upper limit was removed. There was a new surtax on investments of 3.8% and the death tax went from zero to 40%. New individual and employer Obamacare taxes took effect along with scores of other Obama tax hikes. The 35% corporate tax rate (world’s highest) is responsible for shifting jobs and investment abroad and businesses keeping $2 trillion overseas. The unseen effects of these massive tax increases will hobble the economy until abnegated.
We can see the reduction in the official unemployment rate; what is unseen is the jobs disaster that is America today. There are 12 million out of work, 12 million on disability and nearly 50 million (one in 5 households) in breadlines – err, on food stamps. The labor force participation rate hit a 35 year low. All (net) jobs being created are part time; there are legions of 29ers and 49ers. The true rate of unemployment is 15%, not the 6.2% reported.
We see Social Security and Medicare meeting their current obligations but we do not see the demographic time bomb looming for both programs. There is nothing on earth as certain as demographics; 77 million more boomers will retire (10,000 every day) and begin Social Security and Medicare. Spending on both these programs will grow by 8% compounded – doubling every 9 years. Within 10 years we will spend our entire budget on entitlements and interest on the debt leaving nothing left over for defense or for the rest of the government.
We see interest rates on federal debt hovering around record lows costing only $225 billion currently. We blissfully do not see what the interest would cost given a return to average interest rates, i.e. interest cost would increase $500 billion per year to $725 billion, or triple today’s cost. And that’s the rosy scenario. This is a no-win situation: keep rates low and the economy is grotesquely distorted and savings and investment are savaged or raise rates where they should be and the budget deficit goes thermonuclear.
We see government regulation exploding, uncertainty rampant and the scepter of Obamacare hanging over all of us like the sword of Damocles. We do not see the stultifying effects of all these on job creation and the economy.

Looking at the gestalt paints a funereal picture. Average Americans already are 17% poorer over the last 5 years than they would have been in a normal economic recovery – and they will continue to get relatively poorer and poorer each year without any end in sight. The tax and regulatory burden, particularly on investment, has skyrocketed, halting new investment and job creation. Behind the “official” 6.2% unemployment rate lays a dystopian jobs nightmare; we are turning into a country of part time workers. We are reaping a demographic whirlwind still in its early stage. We are living on the razor’s edge regarding interest rates; we have a Hobson’s choice: ballooning interest costs or maintaining negative real interest rates. Finally, all this exists within a milieu of hyper-regulation, vast uncertainty and, of course, Obamacare.

Current CBO Projections for Spending, Debt and the Deficit

Recently (July) the CBO released its latest forecast. The CBO alternate baseline forecast (its most realistic) assumed the average middle class family’s tax burden doubles over the coming generation; it also assumed no more recessions, wars, terrorist attacks, natural disasters and that interest rates remain low perpetually. Despite these horrific (taxes doubling) and grossly unrealistic assumptions, the results are disastrous. The deficit increases by over $100 trillion and the CBO stops forecasting because it can’t conceive of a functioning economy under those circumstances. And all this, dear readers, is based on an uber-optimistic forecast; the reality is much, much worse!

We have been grazing on the fiscal commons for a long time; the pasture is about to give out and the spring lambs are doomed to a life of quiet desperation. We can muddle through for a few – perhaps several – years with temporizing and half measures. Soon enough time will run out and the ineluctable tipping point (Minsky Moment) will be reached. It will get ugly for an extended period, i.e. a lost generation., Eventually, when we emerge from the rubble, we may get it right again – only because there are no other choices – and America will again enjoy more liberty and less government!