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Slaves of Leverage

I attended a Hindu wedding in New Delhi last week. Met a banker from Dubai and asked about real-estate. He said: leveraged, and massively. Leverage was the key word and I saw it. We are slaves of leverage, all of us christians, muslims, hindus, we are all dependent on leverage.

Regard this in the context of co-ordinated rate cuts and regulatory response. The economic world is powerless in front of the beast. Next the monetary authorities will cut rates to zero but leverage remains. The fiscal authorities reach for co-ordinated acts but leverage remains. Even those who are not leveraged want to take debt as real interest rates are sinking deeper into negative territory. It pays off to be leveraged.

My question is how long we endure? Where do we end up? It is a one-way street - finally we use all our effort and earnings to cover interest payments on our mortgage and consumption or business loans to financial institutions. We wander in the darkness of eternal repayments without future. And our only comfort is that inflated values of our real-estate and securities holdings just about match our debt. It is no longer about growth. It is about a fragile balance, globally.

I would want to be an optimist but when the day arrives when individuals or corporations cannot repay, bankcrupties follow en masse. Then we have lost the fragile balance. Governments step in making rebalancing acts and bear the debt on behalf of its citizens and corporations. Iceland has showed the way, the US is creating its own variation of the theme. Finally some government does not meet the requirements and fail to balance its society. What can that nation do? Turn to protectionism and isolationism. Same goes with individuals.

Do we have mechanisms to forgive debt on global level? No, I guess. This is about leverage or unrest. Please give me my debt. I am a slave of leverage. We all are.

 

   

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Comments: (4)

A Finextra member
A Finextra member 27 November, 2008, 21:34Be the first to give this comment the thumbs up 0 likes

I'm old enough to vaguely remember the real 'banana republics' of the 70's.  I say real because of Paul Keating's fear about Australia in the 80's becoming one.  Now I can't be certain but think that the G5 as it was then 'forgave' a great deal of debt in South America in the 70's..although a great many people in places like Argentina lost all of their savings.  So if I'm right, perhaps we do have a precedent? Just a thought.

A Finextra member
A Finextra member 28 November, 2008, 08:10Be the first to give this comment the thumbs up 0 likes

There is a way out, the Keynesian economics. Already on the way in UK, it was used and re-used in History in similar situations (Great depression, post WWII, Germany 20s, Vietnam funding) and replaced some precisely with debt management, as you correctly spotted.

The bottom line is that when states are overindebted, they end up repaying with money that has no value. This crisis will end up in hyperinflation eventually. The Euro will increasingly appear as a fixed exchange rate system among increasingly disparate countries and may not survive. I hope I'm wrong.

John Dring
John Dring - Intel Network Services - Swindon 28 November, 2008, 11:36Be the first to give this comment the thumbs up 0 likes

I enjoyed this thought.  It reminded me that we are all slaves to capitalism.  Capitalism replaces ideology or religion as the control system for the masses.  In the absence of other beliefs, we believe in the reality of money and focus our energies in amassing what we need (to pay the leveraged debt, mostly). 

This keeps (most of) us in line and civil.  Until one day we realise the money isn't as real or safe as we thought, and then you get the civil unrest / anger.  Would be similar if the oil stopped, but the crunch has made that less likely for the time being.

 

Ralph Hazell
Ralph Hazell - The Real Asset Co. and Microexchanges - London 28 November, 2008, 15:00Be the first to give this comment the thumbs up 0 likes

The modern Fiat monetary system exists on the back of debt. One day we will return to a monetary system that is backed by real assets and not debt. Unfortunately this probably entails the current system collapsing.