Though many rightly expect central banks to unleash more "quantitative easing" to goose the global economy, the dominant dynamic will be debt writedowns and deleveraging for a long time to come.
The news media is constantly clamoring about the "Three Ds" that are buffeting the markets: debt, deleveraging, and deflation. We intuitively sense that they're linked -- but how, exactly?
Debt and Deleveraging
To illustrate the forces of debt and deleveraging, let’s consider a home mortgage.
Leverage and Derivatives
In an extreme example, if a bank has $1 million in outstanding loans and has suffered losses such that its cash has declined to $1, it is leveraged 1-to-1-million. It must liquidate enough liabilities and concurrently raise enough cash to restore its 1-to-25 leverage (i.e., 4% of the outstanding loans are in cash reserves).
Deleveraging and Deflation
This example illustrates the pernicious dynamics of debt and deleveraging. The bank cannot declare the true value of its assets (houses that have fallen in value), nor can it sell the houses and take the resulting huge losses, as its cash reserve (collateral) is already at dangerously high levels of leverage (or even negative -- i.e., the bank has no real collateral at all and is insolvent).
Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
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We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.
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