Lead-Lag Live: On the Precipice of a Great Deleveraging
There are many ways to look at the economy. One view is to look at macroeconomics, with big events that can drive markets. By that standard, it’s clear that the economy has a lot of leverage in the system.
With the Federal Reserve raising interest rates, that could cause a few things to happen. Most hope that it will mean the Fed is essentially capped at how high rates can go. The US government, financing a $30 trillion national debt, would prefer that.
But for many, printing more money isn’t an option. For them, that means deleveraging. That simply means paying down debt and finding a better balance of money and credit available.
The deleveraging process means a slowdown in investment. That will mean lower economic returns for longer.
A deleveraging process can also cause liquidity issues. When investors pull back and work to deleverage, they are less willing to provide capital to investment ideas that may require it. That can cause companies to have operational issues from lack of working capital.
The issue may not result from higher interest rates. Rather, it may from the risk premium that investors are willing to pay for. That’s been the case in Japan, where interest rates have been near zero for decades.