When the economic world falls into a black hole like it did a few years back, what is happening beside the obvious stock market crash and economic meltdown is called “deleveraging.”
We, as consumers and participants of this great country, should be versed in economic jargon, and the term deleveraging is an important one. When it occurs, it can be quite devastating, as we found out during the housing blowup.
Deleveraging is the reduction and destruction of debt where the opposite condition is amassing more debt — something we seem to be quite good at. It’s getting rid of the debt, or the “deleveraging” of the debt, where, apparently, we have some problems.
To visualize deleveraging, suppose your household had borrowed too much because you spent too much and now the bills are so high you can no longer pay them.
You must then deleverage, which means somehow solve the problem of having too much debt and not enough money to pay for it.
You can attempt to work out some sort of payment schedule with whomever you owe the money, attempt to have the amount you owe reduced, or worst case, entirely default, which means not pay what you owe.
The restructuring of this debt in any of these forms is the deleveraging part of the equation.
In essence, the debt can’t be paid under its current conditions and you have to change the terms of the deal.
The creditor isn’t to wild about restructuring the agreement and definitely not happy about any default, partial or otherwise. But it has to happen, as you just don’t have the money to pay.
What’s important to understand is that debt doesn’t ever disappear. If you don’t pay, the person you owe money to takes the hit. In no case does the debt just go away; somebody always loses.
When the world deleverages, as it is doing now and has done over the last five years or so, the central banks of the world have paid the debt that was amassed with newly printed money and by increasing public fees and taxes.
They paid the mega banks of the world that held all this mortgage debt because when homes crashed in price, the people who owed that money couldn’t pay.
Governments would like us to think the debt is now gone, but, as illustrated above, debt never “just disappears.”
It just gets transferred from the persons who owe the money to somebody else.
It would have been the banks who took the hit had the governments allowed it. After all, the argument could be made that if the banks made billions in profits during the boom they should take the losses when the bets went bad.
Unfortunately, world governments don’t believe the banks can absorb the losses. They claim the system would collapse and it’s this belief that allows them the leeway to take public money and pay the debt so the banks don’t have to.
Whether they tax the money away from you, or just print the paper to pay for it, all of it eventually comes out of your pocket.
Deleveraging is better categorized as a transfer of debt, and in the case of the massive deleveraging we see today and have seen for the last five years, it just means all that debt from the housing and banking blowup is being transferred from the banks to each and every one of us.
This article expresses the opinions of Marc Cuniberti. Cuniberti hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM on Thursdays at noon. His website is www.moneymanagementradio.com