Global Leverage Problem

Extracted Attributes

• Impact

  Influences global market dynamics and strategic financial decisions

• Nature

  Macroeconomic situation

• Example

  US National Debt

• Characteristic

  Ballooning national debts

• Related Concept

  Leverage points (framework for intervening in systems)

• Amplifying Factors

  Illiquidity, concentration (in financial systems)

• Financial System Vulnerability

  Leverage can create and amplify vulnerabilities

• Government Response (observed)

  Often inefficient interventions, supporting financial sector during crises

Timeline

• Leverage demonstrated its ability to create and amplify vulnerabilities in the global financial system, as seen in incidents like the 1998 crisis. (Source: Web Search Results)

  1998

• The Federal Reserve's rate cut was critiqued as a significant policy error amidst a macroeconomic picture darkened by the ballooning US National Debt, which is part of the Global Leverage Problem. (Source: Related Documents)

  2024-09-18

• Global markets are repositioning for the 2024 US Presidential Election, with widespread fears of inflation compounding the Global Leverage Problem. (Source: Related Documents)

  2024

Twelve leverage points

The twelve leverage points to intervene in a system were proposed by Donella Meadows, a scientist and system analyst who studied environmental limits to economic growth.

Web Search Results

• Solving the Present Crisis and Managing the Leverage Cycle

  swings in returns and losses. In the ebullient stage, the optimists become rich as their bets pay off, while in the down states, they might go broke. Inequality becomes extreme in both kinds of states.14 The eighth problem with the leverage cycle is caused by the inevitable government responses to the crisis stage. In an effort to mitigate the crisis, the government often intervenes in inefficient ways. In the current crisis, the government is supporting the financial sector by holding the [...] Once the crisis has started, the thematic solution is to reverse the three symptoms of the crisis: contain the bad news, intervene to bring down margins, and carefully inject “optimistic” equity back into the system. As with most difficult problems, a multi-pronged approach is generally the most successful. To be successful, any government plan must respect all three remedial prongs, and their order. The unusual government interventions in this cycle have in many respects been quite successful [...] Economists and the Federal Reserve ask themselves every day whether the economy is picking the right interest rates. But one can also ask the question whether the economy is picking the right equilibrium margins. At both ends of the leverage cycle, it does not. In ebullient times, the equilibrium collateral rate is too loose; that is, equilibrium leverage is too high. In bad times, equilibrium leverage is too low. As a result, in ebullient times asset prices are too high, and in crisis times

• Leverage Points: Places to Intervene in a System

  And that’s why slowing economic growth is a greater leverage point in Forrester’s world model than faster technological development or freer market prices. Those are attempts to speed up the rate of adjustment. But the world’s physical capital plant, its factories and boilers, the concrete manifestations of its working technologies, can only change so fast, even in the face of new prices or new ideas — and prices and ideas don’t change instantly either, not through a whole global culture. [...] Population and economic growth rates in the world model are leverage points, because slowing them gives the many negative loops, through technology and markets and other forms of adaptation, all of which have limits and delays, time to function. It’s the same as slowing the car when you’re driving too fast, rather than calling for more responsive brakes or technical advances in steering. [...] technologies made it possible for a few actors to wipe out the fish. The power of big industry calls for the power of big government to hold it in check; a global economy makes necessary a global government and global regulations.

• [PDF] The Financial Stability Implications of Leverage in Non-Bank ...

  standard-setting bodies (SSBs), is already working on some of these issues as part of its NBFI work programme. The FSB and SSBs will undertake further policy work to enhance authorities’ and market participants’ ability to identify, monitor and contain systemic risk associated with leverage in NBFI, drawing on the findings of this report. 3 1. Introduction Many incidents have demonstrated that leverage can create and amplify vulnerabilities in the global financial system, including the 1998 [...] around $48 trillion or about 50% of global GDP (Graph 1, panel 2). This would again be broadly similar in scale to global household debt.12 NBFI leverage is highly uneven across the sector. Figure 2 provides a stylised overview of the balance sheets of the main types of entities in the NBFI sector. While insurance companies, pension funds and investment funds account for a large share of NBFI assets, most of the financial leverage is in OFIs, a group that encompasses a range of miscellaneous [...] leverage creates a vulnerability that, when acted upon by a shock, can propagate strains through the financial system, amplify stress, and lead to systemic disruption. It can do so via two main propagation mechanisms: the position liquidation channel and the counterparty channel. Any disruption could be further amplified by a combination of several related factors, including the amount and concentration of leverage (and its opaqueness), asset valuations, market participants’ inadequate risk

• The Risks of Leverage

  _Source: The Federal Reserve Bank of Chicago,__ In both events, leverage was at the scene of the crime. However, it was leverage _and_ illiquidity or leverage _and_ concentration that caused the problems to spiral. Investors in futures contracts, therefore, need to have enough cash or other liquid investments that can be quickly turned into cash. This way, they can transfer money to their brokers or sell profitable investments to support their accounts. [...] Delving into the risks, two primary issues arise:_performance risk_ and _path-dependency risk_. The former demands thoughtful decision-making, emphasizing the importance of intelligent stacking rather than haphazard accumulation. Prudent investment selection and sizing, especially in diversifying or negatively correlated exposures, are key to mitigating this risk. [...] gilts, triggering further losses. Furthermore, many smaller pensions implemented this trade via pooled vehicles, which were limited liability. This created a principal-agent problem, as the managers of the pools were incentivized to sell positions quickly, rather than give participants time to contribute to positions. The Chicago Fedprovides a more detailed analysisof the crisis.

• How to leverage foresight to address global challenges?

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