Because of a death in the family, I have to run a repeat. This is from 2012, when things looked a lot more bleak than they do now. I’m running it without any updates because that 2012 perspective is interesting. Things are better, but not a ton better. Good enough? Not yet, but will it be?
Imagine you are in a space ship hurtling toward a black hole. You might try to turn the ship around and fire the engines full force. The problem is that the blast from your engines only adds mass to the black hole, making its gravitational pull even harder. What do you do? Fire the engines harder to try to hit escape velocity?
That may sound like a silly analogy for our ecnonomy, and it is definitely far from complete. But as the brilliant John Mauldin discusses in his “Thoughts From the Frontline”, the black hole of debt is posing some very unusual economic problems. This “singularity” is, simply put, a place where the normal equations that describe the universe of economics no longer apply. What can we do when everything we know no longer works?
Singularity.
With that analogy in your head, consider that the life of the creation of debt “singularities” is likely one of the strongest driving forces of the long “supercycles” or K-Waves. These are the patterns of “secular”, or long lasting bull and bear markets that come together in one big cycle lasting 50-70 years.
Mauldin cites one of his favorite economists:
Hyman Minsky, one of the greatest economists of the last century, saw debt in three forms: hedge, speculative, and Ponzi. Roughly speaking, to Minsky, hedge financing occurred when the profits from purchased assets were used to pay back the loan, speculative finance occurred when profits from the asset simply maintained the debt service and the loan had to be rolled over, and Ponzi finance required the selling of the asset at an ever higher price in order to make a profit.
Hyman Minsky.
The process of moving through business cycles appears to followers of this analysis to be an increasing appetite for debt. “Hedge” debt is taken out even by cautious entrepreneurs in difficult times, but may appear to have lower returns than speculation. As investors gradually stop worrying about debt they eagerly chase return, moving gradually into something like a big Ponzi scam.
That’s when the black hole forms. That’s when the rules break down in a singularity.
Back to the spaceship struggling to break out. Anything that increases debt only adds to the problem, making it necessary for us to have even higher velocity to escape. In this analogy, economic growth is the velocity that will get us away, but it has to be done carefully. Debt that is clearly an investment, or a “Hedge” in Minsky’s terms, is very different from the other kinds of debt.
It always takes a little more.
Then again the best shot we have is to somehow deflect ourselves around the black hole and “slingshot” to safety. Mauldin thinks it’s still possible, and so do I – but it will be difficult.
The US still has the chance to pursue what I call the “glide path” option. We can reduce the deficit slowly, by say 1% a year, while aggressively pursuing organic growth policies such as unleashing the energy and biotechnology sectors, providing certainty to small businesses about government healthcare policies, reducing the regulatory burden on small businesses and encouraging new business startups, creating a competitive corporate tax environment (a much lower corporate tax with no deductions for anything, including oil-depletion allowances), implementing a pro-growth tax policy, etc.
I hope we can forgive Mauldin for sounding a bit like a politician here, but there’s a good chance that what we need to do is this simple. And listening to the debate between Presidential candidates right now tells me that there is very broad agreement. So why doesn’t it happen?
Once again, we are stuck arguing about the hard part, which is serious deficit reduction, before we get to the stuff we generally agree on. Focusing for a moment on what we have in common is almost certainly going to be where we have to go from here.
Back to the spaceship. Imagine the crew arguing among themselves and fighting to grab the controls, breaking down any chain of command and fighting each other rather than the problem. You know what will happen to that group no matter what. Even if escape is unlikely in the best situation, we know that such a crew is definitely dead.
Barataria - The work of Erik Hare 
Sorry to hear of your family’s loss –
Wanted to comment, but do not require or need reply – I do applaud your dedication – when my son died, it was 3 weeks before I even thought I could write – and many more before I was writing regularly again –
Interesting post – funny, I read the words “hedge, speculative & Ponzi” and thought, “REALLY?!? Those are the 3 main options for incurring debt to invest in future?!?”
Because each word is So, (at least to my mind) wracked with negative conotations – 🙂
Thanks for introducing me to further stuff to go research – –
Seriously, why isn’t the word “infrastructure” on the list of debt monikers? LOL
I made myself work, line through line, 2 years worth of published US of A Federal Budget, many years ago, just to prove a debate point…..
(I’m lying – I wasn’t trying to debate better, I got so frustrated, I turned prick –
If someone is saying something so outside the bounds of logic, I just ask them how many trillions of dollars of tax income will be lost if all the losers quit drinking, smoking and gambling, tomorrow –
– or ask them if they’ve ever spent 2 years tracking every single tax they pay (I had to call 3 state offices to get the exact numbers to enter what portion of my gas purchase was tax and recently spent 6 hours on the phone and website searches and still couldn’t find out the per-ballot printing cost for a local recall election – shouldn’t that be information pretty easy to find?) –
But I usually start off with, “Have you ever read, line by line, even once, through a Federal budget? No? Talk to the Hand – LOL…..)
Take care and thanks, as always for the food for thought and opportunities to research/learn more – you are appreciated.
Infrastructure is an investment, something I’ve written about long ago. There are great studies which show the net return from it, which is astonishing. As Anna said below calling investment debt “hedge” is somehow not satisfactory, but Minsky clearly takes a dim view of all debt. Calling it investment has judgment all over and separates “good” debt from “bad”. I’m willing to make that judgment myself. We can judge the net effectiveness of investment, after all.
I totally agree – I always chafed at working hard to get minimal results, when with a little thought, planning or implementation of new systems, I could get more done and then take on more work to do! 🙂 Once I received training in 6 Sigma process improvement approach and lean business practices, it was all over –
I sat in my classes each day – – I worked my projects for the certifications and a little voice in the back of my head said, “why can’t this process/perspective be applied to every aspect of life? Hmm…..”
And so I did – – and investment in infrastructure – whether it’s for a nation, a community, a business, the self-employed looking to build a business or simply a homeowner looking at ways to increase their daily quality of life, lower costs and make gains in appraisal values –
To me, whenever debt is taken on to finance these activities, within reason, it allows for continued growth – or ‘buys’ time for improving customer satisfaction, expanding into new areas, etc. –
Which is why I invested in cool new tools to allow me to get more small local independent businesses up and running with easy to maintain online presence/store and business tools, and took some courses for copywriting this year – Did I have the cash? Nope – Am I going to get more customers taken care of in shorter time (and before the 0% APR intro offer runs out?)
Yup – 🙂
But so many top guidelines on debt seem to miss explaining these details –
So always good to see folks who write about and discuss and look to, “how do the experts see it, what does it mean in daily life/choices?” – –
Two things come to mind – the first is that our government needs to track proper “investment” debt much better with GAAP:
https://erikhare.com/2015/03/16/capital-idea/
And an older article on the payback on infrastructure:
https://erikhare.com/2012/11/23/infrastructure-payback/
Bookmarked your links after clicking and realizing, I won’t finish my to-do list if I read right now – BUT, do want to share with you (and you’ve probably already seen, but if not, here ya go….) an item I came across in 2006 – that changed my entire perspective on any subject that involved money, finance, current economic systems – –
New Money for Healthy Communities by Thomas H. Greco Jr. http://www.ratical.org/many_worlds/cc/NMfHC/
The history, perspective, layout, examples, all of it spoke to me – and while I know I’m not an expert – and there may be flaws or ‘house of card’ illogical arguments in it that are immediately apparent to those more knowledgeable in this area than I, I still liked it –
And still think back to each point made and how it was made – and the historical evidence of points – 🙂
Thanks! I appreciate you and your writing so very much!
All debt is a black hole.
I wouldn’t go that far, but it can become one.
An interesting analogy. Debt isn’t always bad, and there is indeed investment even if he calls it hedge. Somehow that seems different to me.
Minsky calls it a hedge, but it’s investment. It’s the “good debt”.
My best to your family. This is an area you should write more about, I’ve always enjoyed your essays on good debt & bad.
Thanks. I guess I probably should talk about this more. The thing is that I’ve always wanted to separate debt into categories like this – and that data doesn’t really exist from what I can tell.