Drowning In Debt: Delinquencies Are Surging And It’s Only Getting Worse

2. Speculative – medium risk – is when an individual or company makes only enough cash-flow to service the interest on their debt. They must also roll their maturing debt into new debt once it comes due.

3. Ponzi – highest risk – is when an individual doesn’t make enough to cover even their interest. They must borrow more to simply pay back old debts. This is an unsustainable situation and will implode on itself. Eventually, there will be huge liquidations as individuals sell everything to raise cash and pay off debts. This will trigger a deflationary recession.

Minsky noticed that economies start out in the ‘hedged’ phase. But over time as markets stay calm and individuals believe the economy is healthy – they start borrowing more debt and begin just paying the interest only.

Putting it simply, they feel confident and safe so they start becoming more speculative.

Then eventually the economy will slow down – as it always has and will – which causes unemployment, deflation, and rates to rise. This is fatal for debtors – which pushes the economy into the ‘ponzi’ phase. 

And not too long later – an economic recession.

So, what does all this mean for today?

It comes down to two simple questions...

First, are individual’s disposable incomes – the actual amount of their paychecks that goes into their pockets – keeping up with their outstanding debts?

Second, is the amount required to service the outstanding debt manageable? And is it becoming more difficult or easier?

Looking at the Fed’s own data – we can see the economy is in the tail end of a ‘speculative’ phase and heading towards the ‘ponzi’ stage.

(Click on image to enlarge)

Since the Fed began raising rates in December 2015, interest payments have trended much higher.

Meanwhile, disposable incomes have decreased and are flat...

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Disclosure: With Regards to the VIX and GLD - these positions I've placed are in their  more

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