Posts Tagged ‘leverage’

“…the world has been binging on debt like never before.

The International Monetary Fund reported last month that total nonfinancial-sector debt has ballooned to an all-time record of $152 trillion… while the global debt-to-GDP ratio has also soared to an all-time high of 225%, up from 200% just 14 years ago.

Worse, we’re seeing record debt at the government level, the corporate level, and the consumer level (via auto and student loans, in particular). The boom in corporate borrowing is especially concerning…

U.S. companies have already borrowed $1.4 trillion this year to date, according to data firm Dealogic. This is on pace to shatter last year’s previous all-time record of $1.5 trillion.

Unfortunately, most are using this money to refinance existing loans… buy back stock and pay dividends… and finance expensive (and often questionable) mergers and acquisitions. This will do little to help the economy. But it greatly increases leverage… and risk.” -Justin Brill

“Sound principles of banking are identical to sound principles of warehousing any kind of merchandise, whether it’s autos, potatoes, or books. Or money. There’s nothing mysterious about sound banking. But banking all over the world has been fundamentally unsound since government-sponsored central banks came to dominate the financial system.  Banking all over the world now operates on a “fractional reserve” system.  A banker can lend out a dollar, which a businessman might use to buy a widget. When that seller of the widget re-deposits the dollar, a banker can lend it out with interest again. The good news for the banker is that his earnings are compounded several times over. The bad news is that, because of the pyramided leverage, a default can cascade.

In 1934, to restore confidence in commercial banks, the U.S. government instituted the Federal Deposit Insurance Corporation (FDIC) deposit insurance….  FDIC insurance covers about $9.3 trillion of deposits, but the institution has assets of only $25 billion. That’s less than one cent on the dollar.” -Doug Casey