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...

...Covid-19 evolves. The problem is that when an economy goes through many years of rising real estate and asset prices, surging debt, and loose monetary conditions, business balance sheets tend to get structured in highly speculative ways that effectively “bet” on more of the...

...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...

...will be “more of the same” – in my 2001 book, I referred to these as “inverted” balance sheets – will outperform businesses who manage their balance sheets more prudently. As a result over many years the less prudent ones will either displace their... https://www.amazon.com/Volatility-Machine-Emerging-Economics-Financial/dp/0195143302

...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...

...everywhere, and especially in China, where decades of artificially high growth, soaring real estate prices, excess liquidity and surging debt have transformed the balance sheet structures of nearly all businesses.

Inverted balance sheets are highly pro-cyclical. As long as...

...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...

...higher-than-expected losses, with lower revenues being reinforced both by rapidly rising borrowing costs and, if the risk of insolvency rises, by rising financial distress costs.

Economies and businesses with highly inverted balance sheets tend to surprise on the upside...

...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.