Thursday, 28 January 2010

‘The year of deleveraging’

Bernard Hickey and the commentators he quotes reckon "2010 is the year of deleveraging.”  Let’s sure as hell hope so, since until it happens the world’s economies will remain in that zombie state between dead and un-dead, between collapse and un-collapse, with everyone standing around reading entrails while businesses struggle under a debt burden they can’t pay while they wait for the recovery they were told was just around the corner.

For each and every struggling business, deleveraging has to happen. And it has to happen before recovery –indeed, it’s one of the primary means whereby recovery is going to happen.

So what the heck is deleveraging, you ask? Basically, it’s when “money goes to money heaven.”  More accurately, it’s what happens when a bank, or a company, or a lot of banks and companies, attempt to decrease their financial leverage—especially by either calling in or paying off debt.  In an economy in which debt is organised into currency, you can imagine that if lots of banks and companies do that all at once it’s going to have some very real implications.

But are they all bad ones?  No, they’re not. It would be foolish to think that what is bad in the singular is foolish en masse, but it takes a special kind of Keynesian foolishness to think so. Frank Shostak explains:

    “Is it true that if every bank were to attempt to ‘fix’ its balance sheet, the collective outcome would be disastrous for the real economy?
    “On the contrary, by adjusting their balance sheet to true conditions, banks would lay the foundation for a sustained economic recovery. After all, by trimming their lending, banks by implication also curtail the expansion of credit ‘out of thin air.’ As we have seen, it is this type of credit that weakens wealth generators and hence leads to economic impoverishment.
    “Contrary to the proponents of the ‘paradox of deleveraging’ we can only conclude that if every bank were to aim at fixing its balance sheet, in the process curtailing the expansion of credit ‘out of thin air,’ this would lay the foundation for a healthy economic recovery.”

If a “year of deleveraging” worries you, then read (or re-read) Frank Shostak’s article and put yourself out of your misery:

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