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Author Topic: De-leveraging - what is it?  (Read 1187 times)

danickstr

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De-leveraging - what is it?
« on: October 17, 2008, 01:18:34 PM »

Here is an excerpt from an article by John Browne, from Seeking Alpha:


(complete article here)   http://seekingalpha.com/article/100452-the-u-s-economy-is-st ill-on-life-support

The extraordinary thing is that virtually no one dares even to mention the real underlying problem--that America has for the past thirty years been consuming more than it produces. During that time, the American consumer, accounting for 72 percent of Gross Domestic Product (GDP), has been financed from the retained earning of foreigners, most notably of China, Japan and more recently Russia.

Based on the willingness of these foreign producers to provide the funds, Americans have engaged in an orgy of easy credit and excessive consumption.  In short, America is no longer paying its way, and is living off the earnings of its economic neighbors.

It is a rake's progress and cannot last much longer, especially as the creditor nations, such as China, will soon need their own money back in order to finance their own leap to 'developed' economy status.

Millions of words have been spoken over the last month alone about how America must solve its economic and financial problems.  But the stark realities that will result from massive deleveraging in the face of a massive recession have been barely considered.  Apparently, no one dares to mention it.

We feel our readers should maintain an acute awareness of these underlying problems, particularly as the Presidential candidates, financial regulators and Wall Street cheerleaders appear bent on concealing the underlying truth.

The $3.5 trillion thus far committed to lubricate the credit markets have yet to produce any meaningful result.  Even that vast total is unlikely to be sufficient to meet the tidal wave of bad loans yet to hit the banking system.


Gee, the future was looking so bright....Loans and rebates for everyone!

I would hate to have to get a factory job....at least those have dried up.
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Nick Dellos - MCPE  

Food for thought for the future:              http://http://www.kurzweilai.net/" target="_blank">http://www.kurzweilai.net/www.physorg.com

John Ivan

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Re: De-leveraging - what is it?
« Reply #1 on: October 17, 2008, 01:46:42 PM »

Here's some thing from the Farlex Free Dictionary.. I wanted to make sure the wording was right.. I sorta understand it, but the term get's used different ways.

First:

"Leverage
1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

Leverage helps both the investor and the firm to invest or operate. It, however, comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater amount than it would've been if the investment were not leveraged - leverage magnifies not only gains but also losses. In the business world, a company can use leverage to generate shareholder wealth, but if it is fails to do so, the interest expense and credit risk of default destroys shareholder value.

Notes:
1. Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares of Microsoft stock, but to increase leverage, you could invest the $1,000 in, say, five options contracts. You would then control 500 shares rather than 10.

2. Most companies use debt to finance operations. By doing so a company increases its leverage because it can invest in business operations without increasing its equity. For example if a company formed with an investment of $5 million from investors, the equity in the company is $5 million and this is the money it uses to operate. If the company uses debt financing by borrowing $20 million, the company now has $25 million to invest in business operations, and more opportunity to increase value for shareholders.
"

Then read:

"Deleverage
The reduction of financial instruments or borrowed capital previously used to increase the potential return of an investment. It is the opposite of leverage.

Notes:
Increasing leverage increases a firm's risk, therefore, deleveraging attempts to lower risk.

When a firm deleverages its balance sheet, that's a sign of slowing growth.
"

It's all about using these instruments to change the value, or potential value of a business. I guess.

Ivan................
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"Transformation is no easy trick: It's what art promises and usually doesn't deliver." Garrison Keillor

 
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