The Economist featured this great article today about the fact that not only financial firms but businesses and individual households will be forced to deleverage over the course of the next few years.
Among the points that I found interest in:
*In the near term delveraging of banks, hedge funds, and households will likely depress asset prices lower. This is because as people sell assets to pay-off debt (deleverage) they will increase the supply of assets in the marketplace.
*Even if the bailout plan goes through the financial industry will likely suffer for sometime making credit harder to come by.
*Thanks to the impact of devleveraging, “a shortfall of bank capital of around $170 million may reduce the potential supply of credit by $1.7 trillion.”
*”Morgan Stanley reckons that total American debt (ie, the gross debt of households, companies and the government) has risen inexorably since 1980 to more than 300% of GDP (see chart), higher than it was in the Depression.”