The Crisis Called by Peace: Everything About the Minsky Moment

“Frenzied overheating is normal”: Markets are inherently designed to break down

• The ‘Paradox of the Forest Fire’ where stability and peace plant the seeds of financial crisis
• The predictable three stages of the financial cycle leading to the ‘Minsky Moment’
• The ‘Antifragile’ strategy to survive and thrive in chaotic markets

How Does Peace Sow the Seeds of Chaos?

“Markets overheating wildly does not mean they are broken. Frenzied overheating is normal.” This statement implies that market crashes, or the Minsky Moment, are not bugs but built-in features of the system. The paradox that stability and peace actually breed greater instability and catastrophe is the first step to understanding markets.

The best metaphor illustrating this paradox is the ‘Paradox of the Forest Fire.’ A healthy forest periodically burns small fires to clear dry leaves and fuel on the ground. If humans perfectly control every small spark, peace may seem to prevail temporarily. But during that peace, decades of fuel accumulate, and eventually a single unavoidable lightning strike ignites a massive wildfire that consumes the entire forest. Ironically, the perfect control intended to protect the forest becomes the seed of disaster.

Financial markets operate on the same principle. Economist Hyman Minsky explained through his ‘Financial Instability Hypothesis’ how market stability inevitably breeds instability.

Minsky Moment: The Predictable Three Stages of Collapse

Minsky divided the financial system’s state into three stages based on participants’ debt repayment ability. This is a predictable journey toward chaos.

1. Hedge Finance – The Era of Peace

The healthiest and most stable stage. Borrowers (companies, individuals) can fully repay both principal and interest from their cash flows. The market is cautious after past crises, with thorough risk management.

2. Speculative Finance – The Era of Optimism

As peace prolongs, people forget risks and become optimistic about the future. Borrowers at this stage can cover interest from cash flows but rely on rolling over debt (extending maturity) expecting asset prices to rise to repay principal. This is when dry leaves start accumulating on the forest floor.

3. Ponzi Finance – The Era of Madness

Finally, the market is engulfed in madness. Borrowers cannot cover even interest from cash flows, let alone principal. Their only survival strategy is that asset prices will rise “forever” and “steeper.” This structure is identical to a Ponzi scheme, where new investors’ money pays interest to earlier investors.

Then comes the Minsky Moment. A minor event like an interest rate hike or regulatory tightening stops asset price increases. Vulnerable Ponzi investors collapse and start selling assets, triggering price declines. Falling prices topple speculative investors too, and the small spark turns into a massive financial wildfire engulfing the entire market.

The Human Psychology Behind Bubbles: Why History Repeats

The fundamental reason the Minsky cycle repeats is human psychology, predictably irrational.

Confirmation Bias: Seeing Only What We Want to See

The tendency to seek information that confirms existing beliefs and ignore opposing evidence. During the 1990s dot-com bubble, investors were captivated by the “new economy” narrative and ignored clear warning signs like deteriorating internet company profits. They only sought rosy growth prospects. This pattern repeats today in debates over the AI bubble.

Loss Aversion and FOMO: Fear Breeds Greed

Behavioral economics shows humans feel losses about twice as intensely as gains (loss aversion). Behind this is the fear of missing out (FOMO). Watching others get rich causes pain from “opportunity cost loss.” I personally felt strong FOMO during the 2021 cryptocurrency frenzy, wondering if I should jump in.

Meme stock crazes like GameStop, cryptocurrency booms and busts, and NFT bubbles are tragedies created solely by FOMO, unrelated to company fundamentals.

Table 1: Anatomy of Historical Bubbles – Repeating Patterns of Human Psychology

Reflexivity Theory (Soros): Thoughts Create Reality

Legendary investor George Soros argued that market participants’ perceptions actually create objective reality. The belief that “prices will rise” triggers more buying, pushing prices up, which reinforces the initial belief—forming a positive feedback loop that creates bubbles. The 2008 housing bubble belief that “US home prices never fall” is a perfect example of this reflexive cycle.

Minsky Moments in History: From Finance to Geopolitics

The pattern where stability sows chaos repeats across history and society.

• Historical Tragedy (Belle Époque): Europe’s unprecedented peace and prosperity before WWI (‘Belle Époque’) allowed imperial rivalries and rigid alliances to fester, until a single shot in Sarajevo plunged the continent into war.
• Financial Tragedy (Greenspan Put): The belief that the Fed would always cut rates to rescue markets encouraged extreme moral hazard among financial institutions, planting seeds of the 2008 global financial crisis.
• Corporate Tragedy (Innovator’s Dilemma): Market-leading firms like Kodak, Nokia, and Blockbuster ignored disruptive innovations to protect current success (peace), leading to their downfall.
• Geopolitical Tragedy (Thucydides Trap): When a rising power (China) threatens an established hegemon (US), structural tensions increase war risk despite neither side wanting conflict.

Survival Strategy in Chaos: Thinking ‘Antifragile’

If peace inevitably breeds chaos, what should we do? Thinker Nassim Nicholas Taleb offers the answer in the concept of ‘Antifragile.’ Antifragility means gaining from shocks, volatility, and stress to become stronger. As he says, “The wind blows out a candle but fans a fire.” Our goal is not to be a candle extinguished by change, but a fire fueled by it.

Barbell Strategy: Practical Antifragility

Taleb proposes avoiding the mediocre middle and combining extremes in the ‘Barbell Strategy.’

• Extreme Safety (85–90% of assets/effort): Allocate most to ultra-safe places like government bonds or cash to ensure survival.
• Extreme Risk (10–15% of assets/effort): Allocate a small portion to high-risk, high-reward ‘options’ like venture investments.

The key is that losses are capped at 10–15%, but gains have unlimited upside. When unpredictable shocks (Black Swans) occur, you avoid ruin and can reap huge rewards.

Personal Investor Checklist to Prepare for the ‘Minsky Moment’

How ready are you for the coming crisis? Check yourself with these questions:

1. What is the debt level in my portfolio? (Is it safe ‘hedge’ or risky ‘speculative’ or ‘ponzi’?)
2. Am I trapped in confirmation bias? (Am I ignoring negative information about assets I own?)
3. Is my investment driven by FOMO? (Am I chasing buys because others are making money?)
4. Am I applying the Barbell Strategy? (Have I avoided putting everything into ‘medium risk’ assets?)
5. Do I imagine and prepare for the worst-case scenario? (Like Stoic ‘premeditation of evils,’ do I have a plan if asset prices crash?)

Conclusion: Riding the Wave of Chaos

We examined how stability breeds instability and how this leads to the Minsky Moment.

• Key Point 1: Prolonged peace and stability erode risk awareness, increase debt and speculation, and inevitably weaken the entire financial system.
• Key Point 2: Human irrationalities like confirmation bias, FOMO, and reflexivity are core drivers repeating this collapse cycle.
• Key Point 3: Rather than trying to predict crises, it is wiser to build antifragile strategies (e.g., Barbell Strategy) that grow stronger when crises hit.

Our goal is not to prevent overheating and collapse but to build systems that survive and thrive by harnessing their energy. We should respect chaos rather than fear it and apply antifragile principles to life and investing.

How about reviewing your investment portfolio once more from an antifragile perspective?