Minsky described three types of business entities that make up our economy. 1) Hedge 2) Speculative 3) Ponzi. The balance shifting between these types of business can foretell where our economy is going.
1) Hedge business takes on debt that it can comfortably retire on a schedule, including any interest accrued. It uses that debt to expand its market, update its production infrastructure, and innovate new product offerings, but only to the extent that it presumes it can repay with expanded profits.
2) Speculative business is always "rolling over" its debt and only paying accrued interest to lenders. It most often leverages newly purchased business assets, depending upon increasing share value for profit until it has maximized investors' appetite for risk, at which time it usually bails and leaves the business poorer than when it was acquired (Hostess).
3) Ponzi businesses have no hope of showing a profit for shareholders and only continue to exist out of sheer momentum and investor ignorance or stubbornness (Uber?). Their continued existence often takes down others who compete with them or have crossover interests that are deteriorated by irresponsible price setting.
He then goes on to state that the mix of these types of businesses in the marketplace (defined by the percentage of GDP) shifts remarkably depending upon the economic conditions and the willingness of the government to regulate them. Good economic times create a lack of caution on the part of lenders that inevitably degrades the overall economy, and as we saw in '29, 2000, and '08 cause serious recessions or depressions.
As dollars shift from the highest stability of Hedge type business (usually mom and pop type of smaller businesses with lots of future skin in the game) and migrate toward Speculative and Ponzi types the economy grows at a faster pace, until it doesn't and default on debt threatens the system. It is almost like supposed responsible and conservative bankers get on a sugar high in periods of economic growth and no one wants to cut back their intake, least of all politicians who are charged with regulating them.
