Question

Explain beautiful deleveraging

Answer 1

Deleveraging refers to the reduction in the leverage ratio, or reduction in the percentage of debt in the balance sheet of a firm. Taking the case of government balance sheet, it can be done in the following three manners:

1. Austerity: It refers to spending less and increasing tax rates to increase revenue of the government.

2. Debt restructing: In this case creditors of the government are generally paid less amount of money or are paid over a longer time frame. The rate of interest is also reduced in some cases.

3. Printing of Money: When rate of interest are close to zero, then the last option for the government is deficit financing of printing of more money by the federal Reserve.

Beautiful Deleveraging occurs when the three options are working in a balanced manner. There exists certain amount of austerity, certain amount of debt restructing and a certain amount of printing of money. When dome in the right mix it will not lead to deflation, depression in the economy. The debt to income ratio will fall and there will also be positive slow growth in the economy.