Saturday, July 17, 2010

Deleveraging the Monster Bubble

From Econotwist's blog:

How long will the deleveraging process take? How painful? Will it create the conditions for growth, and if so, what kind of growth?  Will we seek and find light at the end of this dark tunnel?  Or will we let it get progressively darker to the point where seeking becomes damned near impossible?

The point of the chart above is to emphasize the enormous growth of leverage within the global financial system (individuals, corporations, banks, and governments) over time and the "deleveraging of the greatest economic/finance bubble in history" according to Christopher Laird:
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.
It is in crisis that the seeds of opportunity are supposed to take root. However, instead, it appears all the seeds of opportunity planted themselves in and around the Big Six.

"Fifteen years ago, the assets of the six largest banks in this country totaled 17 percent of GDP ... The assets of the six largest banks in the United States today total 63 percent of GDP." -- Sen. Sherrod Brown of Ohio quoted from Simon Johnson's book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown


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