Deleveraging Explained in One Minute: From Definition to Examples

The term "deleveraging" may not seem like that big of a deal to the average person but it most definitely represents one of the most terrifying words to economists, for the simple reason that it can lead to deflationary nightmares.


As explained through this video, deleveraging basically means reducing debt and at the individual level (for the average person or business), it represents the responsible thing to do when things turn sour. In other words, if a person goes through economic pain or a business suffers, it makes sense to (among other measures, of course) pay down debt so as to increase the likelihood of ending up on a sustainable path.


Think of deleveraging on a granular level as bitter but necessary and ultimately effective medicine. You take the hit/pain but know or at least hope that there is a silver lining that revolves around sustainability.


Problems start appearing, however, when everyone deleverages. While responsible and understandable at an individual level, it can and will turn into a macroeconomic nightmare in true "Paradox of Thrift" fashion once or if everyone does it and this video explains why.


In a nutshell, you will find out what deleveraging is all about in approximately one minute, from definition to hopefully entertaining examples :)