The Interesting Times is a short digest of the most interesting things I find on the internet, typically centered around finance, tech, bitcoin, complex systems and decision making under opacity.
“No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.” Ian E. Wilson
The Interesting Times is a short digest of the most interesting things I find on the internet, typically centered around finance, tech, bitcoin, complex systems and decision making under opacity.
It has a three-piece framework for thinking about financial markets
Minsky begins with the observations that governments are much more active in markets than at the beginning of the 20th century which mitigates some of the downside risks to firms but can lead to an inflationary bias.
The much greater participation of national governments in assuring that finance does not
degenerate as in the 1929-1933 period means that the down side vulnerability of aggregate profit flows has been much diminished. However, the same interventions may well induce a greater degree of upside (i.e. inflationary) bias to the economy.
He then divides economic entities into three classes:
Hedge Entities
Speculative Entities
Ponzi Entities
Hedge entities are
those that can pay their contractual obligations through their cash flows and tend to have very little debt.
Speculative Entities can meet their commitments as long as they can "roll over" their liabilities (e.g. issue new debt to meet commitments on maturing debt).
Ponzi entities are those where the cash flows from operations cannot fulfill either the repayment of principal or the interest due on outstanding debts.
If most entities are hedge entities, the economy can be accurately modeled by an equilibrium seeking model (which most economic models are)
Narrator: But most entities aren't hedge entities...
Over long periods of prosperity, what tends to
happen is that entities get more and more confident and take out more and more debt. If future growth is assured, more debt just puts fuel on the fire, right? As a result, the economy tends to shift to an unstable system as debt issuance increases.
Over a long period of good times, as debt increases, more and more hedge entities become speculative and speculative become Ponzi.
An increasingly large portion of the economy relies on being able to roll over their debt in order to keep running.
If liquidity dries up and those speculative and Ponzi entities can't roll over their debt, ponzi entities evaporate and speculative entities become Ponzi entities, leading to a rapid collapse in asset values.
This is "The Minsky Moment." and may explain, in part, why markets tend to "take the stairs up and the elevator down."
It is a deeply unintuitive notion: greater periods of stability breed greater periods of
instability. The more stable things seem, the more willing entities are to use debt, which leads to more entities failing when the Minsky Moment strikes.
On Monday of this week, Bitcoin experienced a "halvening" where the block rewards received by miners are cut in half, an event that happens every four years or so and results in Bitcoin's limited total supply yielding the many comparisons to digital gold.
I wrote this post a few years ago to explain why I believed Bitcoin was valuable and it's held up quite well in my opinion.
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