Slaves of Leverage [23.11.2008: Revisited]

Slaves of Leverage (23. October Flight SK967 Delhi - Copenhgen)

I attended Hindi wedding and met HSBC banker from Dubai there. Asked about real-estate market in Dubai. He said it is massive and highly leveraged. Leverage was the key word repeated. And I realized it: we are slaves of leverage all of us christians, muslims, hindus, all dependent of leverage.

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

My question is will that last? Where we end up to? It is one-way street and finally we use all the money we can earn to pay interest to a bank who has given our mortgage and consumption loans. We wander in the darkness into the future of debt repayment which we can never reach. And our comfort is that real-estate and securities portfolios have values that are as inflated as we are in debt. Then it is no longer about growth and development, only about fragile balance. This will last as long as the balance lasts…globally. I would want to be an optimist but when the day arrives an individual cannot repay or a corporation cannot repay, bankruptcies follow.

Then we have lost the balance, governments will step in making re-balancing acts like purchase of bad debt and take the debts on behalf of citizens. Iceland leads the way. But can all be like minuscule Iceland. Finally some government cannot get the loan it needs. What can that nation do? Turn to protectionism and say it will not pay its debt. What if individuals do so. Do we have mechanism to forgive loans 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.

[AUTHOR REMARK 1.1.2022 oh what did I know about leverage in 2008. Could not imagine what we have seen. But the road, it has been clear since writing this piece.]