Deleveraging Our Nation
In a WSJ article from yesterday, the author explores how prices are dropping right and left, leaving our nation open to the very real possibility of deflationary forces. What’s this mean? Things get cheaper. But as the article confirms, “deflation can lead to a vicious spiral of business closures … and layoffs.”
But one phrase in particular caught my eye:
“We’re in a national crisis,” says Harley Lance Kaplan, a financial adviser in Sherborn, Mass. Still, he adds, “this deleveraging is absolutely essential. We’re clearly overleveraged as a society.”
What’s all this talk about leverage and deleverage? Leverage “generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity.” So leverage, deleveraging, and getting the leverage out of the system means just this: we’ve borrowed too much. Businesses (particularly in the finance/housing sectors) used debt unwisely and with abandon. They’ve spent way more than they’ve earned, and piled on the borrowed money.
In good times, this strategy can certainly work well - borrow money, and you get outsize returns without risking too much of your own capital. But when the tide turns, it means outsize loses, and is particularly worrisome in that it’s extremely difficult to know when the tide will turn.
The earn more than you spend mantra matters to everyone: nations, businesses, and individuals.
