Hyman Minsky, the late Columbia University credit cycle expert, taught us that a long credit and asset-market boom fueled by cheap money inevitably leads to a moment when those markets flip and panic selling sets in. All too often, those moments came when interest rates started to increase at a rapid pace. In turn, defaults become very much more common as borrowers find it difficult to service their debt when they have to roll over low-interest-rate loans at very much higher interest rates. At the same time, stock markets at high valuations lose their appeal as high-yielding government bonds offer a more attractive and less risky investment alternative.
If ever we have had a long credit and asset market boom, it must have been over the past five years, when those markets were propelled higher by cheap central bank money in the wake of the 2020 COVID-19 economic recession. While it is always difficult to predict the precise moment when the market bust occurs, the recent rise in long-term interest rates to multiyear highs both at home and abroad would suggest that we cannot be far off from another Minsky moment.
