“Deleverage” is the new hot word in the global economy. Both McKinsey (requires subscription) and the Economist say that now it’s the time to deleverage. But who should deleverage and what exactly?
That’s the tricky question. An enlightening article by Satyajit Das tells us that “(d)e-leveraging requires liquid markets and buyers with capital to purchase the assets. Ultimately, prices of risky assets must adjust to market clearing levels as the system reduces debt.”
Today we are looking at the deleveraging of corporate and personal balance sheets. One of the channels of deleveraging will be, obviously, unemployment. Another important channel will be company defaults. The negative feedback loop will inevitably lower asset prices. We also need to keep an eye on inflation, and especially on energy prices.
Who will lose: Everyone that doesn’t have a sustainable cash-flow and a stable business model. The real estate sector.
Who will profit: The banks, sort of. The bankruptcy lawyers. Everyone who can develop demand-creating innovation.
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