What Happened? The U.S. Economy and Minsky’s Cycle

I know. Reading about Hyman Minsky might seem like the last thing you’d want to do during a global pandemic, but hear me out. This renowned American economist helps offer explanations for many of the issues that we see today, both in the global asset markets and in our daily lives. Even though we should not view models as reality, we can gain interesting perspectives by looking at the world through different lenses.

What is Minsky’s Cycle?

It goes as follows. Long periods of stability and times of prosperity lower the perception of risk. As a result, people engage in riskier investments and higher amounts of leverage. In the end, this overconfidence leads people to ignore details and make investment decisions that they normally wouldn’t. Ultimately there is a collapse of asset values, and we can say that many times stability is the breeding ground for future instability.

Let’s classify the effects seen today under what is called Minsky’s Cycle. As Mike Wilson, Chief U.S. Equity Strategist and Chief Investment Officer for Morgan Stanley, explains in the Thoughts on the Market [1] podcast on March 30, 2020:

“In the past month, we’ve experienced a full bear market, down 20%, and a full bull market, up 20%. Of course, this volatility follows a period of calmness, during which we observed some of the lowest volatility readings in history. As noted by famed economist Hyman Minsky, the onset of a market collapse can be brought on by the speculative activity that defines an unsustained bullish period.”

After recovering from the 2008 financial crisis, the United States has experienced strong economic growth with record low unemployment numbers. However, when looking at the Dow Jones Industrial Average it’s evident that the recent COVID-19 outbreak had ended that 11-year bull run.

Last decade’s bull ride has lulled people who have been making large gains by their own ability into a false sense of security. The many successes people have experienced during this time have caused them to disregard certain details. The long duration of this economic prosperity did make many cautious of a potential downturn; however, whenever there were signs of an economic downturn, the U.S. government stimulated the economy by cutting interest rates — thereby calming worried investors. But it was only a matter of time before an unexpected event rocked the boat.

COVID-19’s Impact

The pandemic has put a halt to most global economic activity. Most services and products that require travel or a physical store presence have been shut down. This has cut into the revenue of all kinds of companies, from small brick-and-mortar businesses to Fortune 500 corporations.

In addition, companies that entered this difficult situation highly leveraged will not have the same level of cash flow as they did before to meet interest payments. As a result, companies that do not receive a source of funding may go under.

Fortunately, the U.S. government has passed a stimulus bill that seeks to keep businesses and consumers’ heads above water. For businesses, this bill includes loans of $29 billion for passenger and cargo air carriers, $17 billion for national security businesses, and the remaining $454 billion will go toward states, other businesses, and municipalities, according to CNN.[2]

However, those that cannot afford a slowdown in consumer spending will have to find ways to cut costs. Macy’s, Kohl’s, and Gap have already furloughed a combined total of 290,000 employees, according to ABC News.[3] As a result, rough financial conditions have the potential to bring down highly leveraged firms with underlying financial troubles. This is especially true for those companies that are unable to cut costs sufficiently in relation to a decrease in consumer spending.

Staggering Debt Levels

Due to increasing levels of debt, lacking a source of income can have devastating effects. This is as true for companies as it is for households.

For firms, not being able to generate cash flow to meet interest payments on debt can have a range of consequences, from hurting the companies’ capability to borrow in the future to their not being able to cover the debt anymore and proceeding into bankruptcy procedures. Given that the level of corporate debt has been rising over time, the worst-case scenario of defaulting on the debts is even more likely. However, the U.S. government is providing aid to companies in distress, especially to cover overhead costs such as labor, rent, and utilities.

For individuals, household debt has been increasing and surpassed $14 trillion in the last quarter of 2019, according to the Federal Reserve Bank of New York.[5] The majority of the debt is housing-related (mortgages), in addition to student loans, credit card loans, and auto loans.

Similarly, the government stimulus bill will provide aid through student loans, unemployment benefits, and direct payments that individuals can use to meet payments.

Softening the Blow

By being cautious and allocating sufficient resources to making themselves more recession-proof during times of economic prosperity, firms can prepare to soften the blow of unexpected events like those we are experiencing today. This ties back to Minsky’s Cycle: given that stability breeds instability, by being mindful of our decisions during good times we can alleviate our situation during bad times.

So, what does all this mean? We must accept that there will always be systemic risks that are beyond our control. However, by preparing ourselves during favorable times, we are better able to face adverse times. I am not downplaying the adversity that everyone is facing, but I seek to encourage all of us to make the most out of the already challenging situation.

Minsky’s Cycle Is Not Reality, So Why Care?

Models seek to approximate and predict what we are experiencing in the real world. Despite that they come short of describing reality, we can learn interesting things about our world, and it allows us to think about the same issue in multiple ways.

The information and things we learn should be carefully examined to determine whether they make sense. From a careful vetting process, we can consider key takeaways. Trying to look at topics from different points of view will widen our world, and, as a result, our experiences.

Final Remarks

By staying level headed amid these circumstances, we can make our best decisions. I encourage everyone to spend this time working on themselves and thinking about their current business so that we are prepared when this situation subsides. Because we will get through this and when we do there will be a wide range of new opportunities.

Take care of each other and let us all try to support each other as much possible. I hope that all of you and your loved ones stay safe and in good health.

To Spend Your Time Effectively is to Manage Your Energy.

You’re finally home. There are some hours left before you usually go to bed. Plenty of time to work on that thing, you always wanted to get done.

However, you don’t have the energy. You feel completely drained.

Even though you managed to get some time free, you can’t make anything of it.

So how can we manage our energy to make the most out of our time?

Time, energy — what’s the difference?

Without going into the many definitions of time, we’ll stick with time as a measure of what clocks on earth indicate.

We’re all familiar that we only have a limited amount each day. We seek to make the most of it, and in an attempt to do so, we go to such limits as to deprive ourselves of sleep. But one thing is sure: time is finite and uncontrollable.

Energy, on the other hand, is the amount of effort we put into our tasks. The critical distinction is that we can control our energy and that it is renewable.

But which one is more valuable to us?

Given that our time is limited, it can be said that it is dearest to us. However, if we consider that time alone will not bring us anywhere, energy becomes all the more valuable.

For every task in time, there is energy required to complete it.

You can look at it like this:

Our goal is to make a painting. Time is the canvas upon which we paint. To paint, we have to put in the energy. Therefore, the canvas (or time) alone will not allow us to achieve our goal.

Yes, time is valuable because it allows us to put our energy to use, but if we are not considerate of our energy allocation, we’ll lose it in unwanted places. As a result, we can run out, and we’ll have no use with the time left.

Where we lose energy

We discern four types of energy: those which spring from our body, mind, emotion, and spirit.

For each type, here are the most important ones:

Body

Eating habits — Take in high concentrations of anything will disrupt the rest of your day. We have the terrible habit of taking in far more calories than we need.

Sleeping habits — With today’s hustle culture, we fail to remember something essential: sleep. If our work interferes with our sleep, the lack of sleep will interfere with our work.

Work habits — Overworking, whether it be in the gym or at work, puts a strain on your body. Unproductive periods will follow, causing you to spend more time recovering.

Emotions

Consider the number of times we are frustrated or annoyed about something. Remember how that makes you feel — it drains your energy, and we have to make sure we control it (but not avoided) at all times.

Mind

Repeatedly looking at your phone throughout the day disrupts your workflow. Instead of being focused on the task at hand, we force ourselves to jump around and become less centered on what we’re doing now.

Spirit

Having negative motivators deprive us of our energy in the long term. Having a clear purpose and doing meaningful work will pull you through challenging moments.

- Actionable Advice -

Each type of energy has a specific way to be refueled, as Tony Schwartz notes in a Harvard Business article:

“…energy can be systematically expanded and regularly renewed by establishing specific rituals — behaviors that are intentionally practiced and precisely scheduled, to make them unconscious and automatic as quickly as possible.” — Tony Schwartz

So here’s how to manage your energy:

Physical

Always seek to eat unprocessed food. Make sure you don’t eat too much of anything but balance your diet out with a variety of foods.

If we sleep well, we will do our tasks more efficiently, causing us to save time in the end. However, it depends on person to person; what time (and for how long) you work most efficiently. There is a certain threshold of enough sleep. Find yours and adjust your schedule accordingly.

A balance of hard work and relaxation is essential. It will provide you with the much-needed energy to make the most out of your work.

Emotion

Discern between the things you can control and those you can’t. Becoming angry or frustrated about things that are outside our reach is pointless. So, learn to manage your inner emotions at all times, because they are within your control.

Mind

Focus on your breathing throughout the day. Deliberately make some free time when you are alone. This can be through working out, meditating, walking in nature, etc. This will allow you to maximize your focus on the task at hand. So, when you do something, do it with your complete attention; otherwise, you’ll miss out on all the good stuff.

Avoid spending time on social media. Instead, allocate a limited period of time to when you will be responding to your messages. If there is something urgent, they can always call you.

Spirit

We should only direct our energy towards things that bring us closer to our end goal. This can range from doing a job to sustain a life you like, help others because it is part of your value system, working on your passion, etc. Be motivated by yourself, positive thoughts, and people that inspire you.

Michelle Obama put it very well when she said:

“… always stay true to yourself and never let what somebody else says distract you from your goals … when I hear about negative and false attacks, I really don’t invest any energy in them, because I know who I am.” — Michelle Obama

Thank you. I hoped this helped. Please let me know what your thoughts are.

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