The Truth about Economics: Part 11 It’s Deleveraging, Not Deflation

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(See Comic) The dearth (lack) of credit which marks the crisis is caused not by contraction but by the abstention from further credit expansion. “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” And this isn’t just debt Americans owe to each other; a quarter of it is owed to foreigners. Ludwig von Mises (1881-1973) One of the few truly great economists of history. Total Debt (public and private) versus Income growth in the United States 1960 – 2008 Deleveraging: The reduction of financial instruments or credit (debt) that was used to increase the potential return of an investment. It is the opposite of leverage. Deleveraging is an attempt to lower risk. When a firm deleverages its balance sheet, that’s a sign of slowing growth. When credit stops expanding sufficiently, it is time to deleverage.