Deleveraging is the process describing the unwinding of debt. Companies often use leverage (i.e. borrowing) to stimulate their growth, but when they become concerned about defaulting ot about rampant losses, they are forced to use deleveraging in order to lower the risk of default and mitigate their losses. By deleveraging their balance sheet, companies can free some of their debt and thus lower their overall risk profile. Deleveraging can have serious financial repercussions when a company tries to unwind assets that are illiquid. In this case, deleveraging may mean selling assets at unreasonable discounts. As a result, deleveraging may create downward pressures on security and asset prices as more and more companies unwind their positions during the deleveraging process.
As described in detail in many of the internet’s financial blogs the business world today has sunk into a condition of protracted forced liquidation. This environment creates dangers and traps but also some surprising investment opportunities. Nevertheless, one has to be very cautious when trying to search for buying opportunities as the economic picture is still very blurry in every aspect. It is impossible to say yet when this seemingly endless deleveraging process is going to end.
During the current period the world’s financial markets are experiencing an enormous deleveraging that has crippled the global economy making enormous amounts of money virtually evaporate. It is arguably the first time in history that this phenomenon of deleveraging has become so massive and it’s effects – already apparent in almost all the financial sectors- are expected to create long lasting problems. We are living a historical phase that will fundamentally alter the way our financial world functions. This massive deleveraging is leading to a new era for the global economy and our civilization as a whole.