Thursday, January 24, 2013

Deleveraging: When Will They Ever Learn?

The recent recession was caused by the overexpansion of credit.  Part of the financial recovery from a bubble is the reduction of debt on a society's collective balance sheets (businesses, financial institutions, households, and governments.)  This reduction is referred to as "deleveraging."

The Economist's Buttonwood columnist worries that "the US is the only nation where it's possible to argue that any deleveraging has occurred."  For most developed countries, overall debt to GDP ratios are higher now than during the financial crisis.

Even that is not enough, he says: "Nevertheless, if you think the system was overgeared in 2007, at the height of a credit boom, then it's hard to argue it's not overgeared now. " "Gearing is British for levering.  Americans convert the noun, "leverage," into a verb for the same purpose.

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