In economics, leverage can be divided into broad sense and narrow sense, and narrow sense refers to "financial leverage". When an enterprise is short of its own funds, it can borrow money to raise funds, put them into production and get more benefits. Is to do your own thing with other people's money. But there are risks. If the enterprise loses money and the loss is greater than the amount of its own funds, it will be insolvent. General enterprises will find a suitable balance point, which can not only make more money, but also ensure controllable risks. This indicator is called "asset-liability ratio".
Leverage in a broad sense covers all economic behaviors of "taking small bets to make big ones", but the core is borrowing. For example, in the futures market, you have one dollar, but the market allows you to place an order of ten dollars. If you lose a dollar during the period, you will be forced to quit.
Leverage in macroeconomics works by using multiples of capital flows. Such as raising interest rates and cutting interest rates. The interest rate of plus or minus 0. 1% seems small, but the capital flow is not one-off, but repeated many times, so the effect will be magnified many times. Why do you say that? For example, Zhang San borrowed100000 from the bank. He may go shopping at the mall immediately, and the mall will deposit the money in the bank at night. The bank gave a loan to Li Si, who started the company, and the money was still in the bank account. The bank still has so much money, only two more debt relationships.
When the government raises or lowers interest rates, it will also play a role in the multi-level lending relationship, thus producing amplification effect.
Changing the bank reserve ratio is similar.
"De-leverage" is a process in which a company or individual reduces the use of financial leverage. The trend of returning the original "borrowed" money by various means (or tools).
When the capital market is improving, the high income brought by this model makes people ignore the existence of high risks. When the capital market began to decline, the negative effect of leverage began to stand out, and the risk was rapidly amplified. For enterprises and institutions with excessive leverage, rising asset prices can make them easily get high returns, and once asset prices fall, the losses will be huge and exceed capital, which will soon lead to bankruptcy. After the outbreak of the financial crisis, the risk of high leverage began to be recognized by more people, and enterprises and institutions began to consider "deleveraging" one after another, reducing debts by selling assets and gradually repaying debts. This process has caused the prices of most assets such as stocks, bonds and real estate to fall.
The "deleveraging" of a single company or institution will not have much impact on the market and economy. But if the whole market enters this process, most institutions and investors are forced or take the initiative to spit out the money borrowed by leverage in the past, then the impact is obviously extraordinary.
During the economic boom, the financial market was flooded with a large number of complex and highly leveraged investment tools. If most institutions and investors join the ranks of "deleveraging", these investment tools will be dissolved, the derivatives market will also shrink, and related industries will be hurt. With the sharp decrease of market liquidity, it will lead to economic recession.