Deleveraging

The Penny Pincher word of the day: deleveraging. A quaint financial term which means to pay off one’s debt.

Margaret Wente has a wonderful column in this weekend’s Globe and Mail entitled “America’s house of cards – make that, credit cards.”

In this piece, Wente introduces the problem of debt, credit card debt and the concept of deleveraging:

For the past decade, the American dream has been built on a house of cards – credit cards. But getting out of debt is far more excruciating than getting into it. “Deleveraging” is what it’s called, and it’s hard.

“The major institutions of the world all want to deleverage,” says Warren Buffett. That means they’re going to cut down on their lending. Credit card companies are deleveraging too, by clamping down on people’s spending limits and bribing them to pay up.

The crisis that is hitting the United States will soon fall upon Canada as well. We share the same problem: too many people living better lifestyles than they could afford. The only solution is to become a penny pincher extraordinaire.

The economy will be in for a nasty correction as Americans (and North Americans) are wallowing in debt. As the Economist succinctly notes in “A fate worse than debt“: “IT IS ugly, but deleveraging is the word of the moment.” Companies will be looking to pay down debt, and consumers will have no choice given the collapse of the housing market (and the loss of “equity” in their homes) and the soon to skyrocket interest rates:

Consumers, in particular, were encouraged to borrow by low unemployment and interest rates and (until last year) rising asset prices. Their debt jumped from 71% of GDP in 2000 to 100% in 2007, a bigger increase in seven years than had occurred in the previous 20.

In other words, get ready to save. If you are deep in debt, then it is time to get your financial house in order before it collapses on you.

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