Is the U.S. Headed Towards a Minsky Moment?

Executive Summary

A Minsky Moment, via the Corporate Finance Institute, “…is named after an American economist, Hyman Minsky, who claimed that markets are susceptible to being unstable and long periods of good markets eventually end in larger crises.” There are three phases in the cycle leading to a Minsky Moment as described in The Details below. Reading this, it appears Minsky is referring to the actions of private investors and debtors. But, in this missive, I will show how this time it is the public sector that is approaching disaster. Notice in the graph below how Federal debt is growing substantially faster than the economy. Interest rates are rising and the amount needed each year comprises a larger portion of the Federal budget. The path ahead seems clear. 

For further analysis, continue to read The Details below for more information.

“Some people use one-half of their ingenuity to get into debt, and the other half to avoid paying it.”
–George D. Prentice

The Details

A Minsky Moment, via the Corporate Finance Institute, “…is named after an American economist, Hyman Minsky, who claimed that markets are susceptible to being unstable and long periods of good markets eventually end in larger crises.

• A Minsky Moment is the point in time that precedes a complete market crash. Minsky Moments occur when investors engage in aggressive speculative activity and increase credit risks during extended prosperous times.

• Hyman Minsky argued that the markets are intrinsically unstable and swing between stability and instability periods.

• There are three phases of credit lending that lead to a Minsky Moment– hedge, speculative borrowing, and the Ponzi phase.”

Minsky described these phases as follows, via John Mauldin’s article “Uncertain Moments”,

“The hedge finance stage: In this economic period, borrowers can repay their debts with revenue or cash on hand. They have enough cash flow to cover both the principal and interest on their loans.

The speculative finance stage: Borrowers can still pay interest on their loans but must continually roll over the principal. They have no choice at this point but to rely on the assumption (or hope) that they can refinance or borrow new funds to cover their principal.

The Ponzi finance stage: Borrowers can only repay their debts by increasing their debt or selling borrowed assets at fire sale prices since many are in the same position and the market knows you must sell, giving you no bargaining position. Borrowers don’t have enough cash coming in to cover either the principal or interest payments on their loans. They can now only rely on the appreciation of their assets or the willingness of lenders to provide additional funding.

Once an economy reaches the third stage, if prices don’t go up and lenders stop lending, then the Minsky moment arrives.”

Reading this, it appears Minsky is referring to the actions of private investors and debtors. But, in this missive, I will show how this time it is the public sector that is approaching disaster. In the graph below, also obtained from John Mauldin, one can see that since the Financial Crisis in 2008-2009, there has been a transfer of debts that previously were held by the private sector, over to the public sector.

Since the Financial Crisis, Federal debt has grown substantially faster than the underlying economy. The graph below shows the growth in Federal debt (blue line) versus growth in nominal (before inflation) Gross Domestic Product (GDP) (red line). From the beginning of 2000 through the first quarter of 2025, Federal debt has grown at an annual compounded rate of 7.5%, while GDP has only grown at a nominal rate of 4.4% annually.

Since late 2021, the average interest rate on outstanding Federal debt has risen to a current 3.3%. However, interest rates remain much higher than a few years ago and approximately $9 trillion of the total $37 trillion debt outstanding is coming due in 2025. This debt will have to be refinanced at what could be substantially higher interest rates. Total interest expense already exceeds $1 trillion per year.

Fiscal deficits will likely continue to grow, adding to the total debt to be financed. Using the “Time Machine” function on USDebtClock.org, the Federal debt could reach about $47 trillion by 2029, a short four years away. Due to the amount of annual borrowing required to cover the U.S. fiscal deficit, which includes over $1 trillion in interest, I would suggest we are likely entering the “Ponzi Finance Stage” as described by Hyman Minsky.

Due to the size and projected growth of the Federal debt, it appears that “growing our way out” of the debt problem is no longer a viable solution. It always amazes me the extent to which the government can delay the inevitable, but it seems clear that the U.S. is heading down the path towards a Minsky Moment.

The S&P 500 Index closed at 6,260, down 0.3% for the week. The yield on the 10-year Treasury Note rose to 4.42%. Oil prices increased to $68 per barrel, and the national average price of gasoline according to AAA remained at $3.15 per gallon.