A San Francisco Federal Reserve Economic Letter from February this year entitled “Will the Economic Recovery Die of Old Age?” concluded that “[r]ecent history suggests the answer is no. Instead, a long recovery appears no more likely to end than a short one. Like Peter Pan, recoveries appear to never grow old.” The economist Hyman Minsky would likely not have agreed with this, and neither would we. Minsky, famous for his Financial Instability Hypothesis, stated that every economic recovery sows the seeds of its own destruction. Typically, in periods of economic stability, excesses build up to the point that they eventually come to bear. Hence, the longer the recovery, the greater the probability/likelihood that destabilizing excesses have indeed been built up; these excesses are almost always caused or amplified by developments in the financial system. In this week’s Economics Weekly, we look at just one potential area of instability—corporate debt—which could turn out to be a catalyst for the next downturn.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.