Minsky Melt-up Explained?!?
America (and the world at large) are in the midst of an entirely predictable demographically driven crisis, between an economic/financial system requiring infinite growth and a very finite human/physical world (detailed HERE, or HERE). This mismatch will only become more acute for decades to come. As the growth of demand is decelerating, central banks are using interest rate policy cuts to encourage higher consumption via greater leverage/debt. Federal debt is soaring absent the economic (and tax revenue) growth to accompany this deluge of debt. I will show that the primary purchasing sources of that debt have turned to net sellers…and that into this breach, the Fed has thrust itself as the buyer (counterfeiter) of last resort. The result is likely to be a Minsky Melt-Up…and then the fall that typically follows.
First, by year end 2020 (estimated below), federal debt will almost surely cross $28 trillion while GDP will collapse in Q2 with likely recovery through Q3/Q4. The outcome will be a debt to GDP ratio likely around 140%…smashing the WWII previous high water mark. Noteworthy also in the chart below are the new standards of ZIRP and reliance on the Federal Reserve balance sheet (QE) to maintain zero percent interest rates.
Since 2008, public (marketable) federal debt has nearly quadrupled, up by $14.7 trillion. Social Security and like Intragovernmental trust fund holdings have risen $1.8 trillion. The Federal Reserve balance sheet has increased by 8x’s, up by $6.3 trillion. In fact, most simply, it is the Federal Reserve using it’s balance sheet as the substitute for the demographically decelerating IG purchasing. As the IG holdings will only continue to decline due to the unfunded liabilities (and with it the primary source of Treasury buying for decades turns to a decade of Treasury selling), the Fed’s balance sheet will rise inversely to avoid an interest rate Armageddon.
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