When a couple of tweets are worth a thousand words…
One of the great benefits of Hyman Minsky’s balance-sheet approach to economics is that it forces analysts to consider how the structure of balance sheets can either dissipate or reinforce underlying conditions, and we may get another lesson in this as the economic impact of…
— Michael Pettis (@michaelxpettis) April 9, 2020
…same.
For example, businesses that leverage up, that shorten debt maturities, that buy more real estate than they need for current operations, or that otherwise increase the riskiness of the liability side of their balance sheets, on the assumption that future conditions…
— Michael Pettis (@michaelxpettis) April 9, 2020
…more prudent competitors or will force them to adopt riskier balance sheets. This is the business equivalent of getting up and dancing as long as the music is playing. Over time the whole economy “shifts” towards riskier balance sheets. This is likely to be a problem nearly…
— Michael Pettis (@michaelxpettis) April 9, 2020
…underlying conditions are brisk, they allow businesses to boost operating profits with balance sheet structures that embed a great deal of speculative activity, but when underlying conditions reverse, instead of higher-than-expected profits, these businesses suffer…
— Michael Pettis (@michaelxpettis) April 9, 2020
…when conditions are good, often developing a reputation for smart management, and then destroy this reputation when conditions reverse. Call it the “Enron” syndrome or, for some of my more mature followers, the “Orange County” or even the “Japan bubble” syndrome.
— Michael Pettis (@michaelxpettis) April 9, 2020
Or the Australian syndrome.