On The Economic Machine

Economies repeatedly undergo expansion and contraction cycles. It is all related to spending. Spending depends on two factors:
1. Income - It rises due to increased productivity or spending by someone else.
2. Credit - Easy credit leads to increased spending.

One person's spending is another person's income. If income rises, creditworthiness increases. Coupled with loose credit policies, this gives rise to expansion and increased debt levels. If the debt levels become higher than what can be serviced through income, recession occurs where people cutback on spending etc. Lowering the interest rates is one way to counter recession.

Deleveraging occurs when the debt becomes too much and lowering interest rate is not an option because they are already zero. The objective is to reduce the overall debt.

1. People and businesses cut spending in order to pay off their debts. This is deflationary.
2. Debts are reduced by restructuring.
3. Redistribution of wealth occurs.
4. Central bank prints money. This enables the government to increase spending and transfer wealth to people who can use it to reduce the debt. Central banks also buy financial assets which drives up their prices making people more creditworthy.

Has the deleveraging happened successfully for the 2008 crisis? Have the debt levels gone down significantly? IMO, markets will respond based on the degree of reduction of debt levels. If the deleveraging has not been successful, markets are going to tank when interest rates rise. If yes, it is fine. IMO, it was a temporary fix. The central bank has massively expanded its balance sheet.

This thing has piqued my interest. I intend to do a complete analysis on this.

I think price to book value can be used as a proxy for the value of a company.