Friday, July 16, 2010
Worries are expanding over whether or not the global economic recovery is going to be able to persist with banks not lending to consumers. That lack of lending is a result of individuals, corporations, and banks preferring to pay off old debts rather than take on new debt or provide new loans.
Christopher Laird explains this chart as follows:
The point of emphasizing it's from the end of WW2 is that we are not talking merely about a banking crisis, or whatever. We are talking about the deleveraging of the greatest economic/finance bubble in history. Once the level of leverage reached 60 to 1, it becomes impossible to stay ahead of the deleveraging, even for central banks. The implications are staggering. Every major economy in the world is involved. The outcomes of deleveraging this monster bubble, represented by the green oval, will be what I term Credit Crisis II. At 60 to 1 leverage, a loss of 1 to 2% wipes out the capital.
Laird does not specify what that leverage amounts to, but from our understanding it means total leverage within the world financial system. That means everything from individuals, to corporations, to banks and governments. That means, in this scenario, that the world currently stands at 60 to 1, where we are leveraged 60 to the 1 of real reserves we actually have.
Posted by Michele Kearney at 5:04 PM