Book contents
- Frontmatter
- Contents
- Introduction
- Dedication
- 1 Why the World Economy Needs a Financial Crash
- Part I The Economics of Financial Inflation
- 2 Money in Globalised Times
- 3 Neo-Liberalism and International Finance
- 4 Financial Innovation: Better Machines for Financial Inflation?
- 5 The Inflation of Goodwill
- 6 Leverage and Balance Sheet Inflation
- 7 Inflation in Financial Markets
- 8 Asset Inflation and Deflation
- Part II The Culture of Financial Inflation
- Part III Financial Crisis
- Epilogue
- Notes
- Index
6 - Leverage and Balance Sheet Inflation
from Part I - The Economics of Financial Inflation
Published online by Cambridge University Press: 05 March 2012
- Frontmatter
- Contents
- Introduction
- Dedication
- 1 Why the World Economy Needs a Financial Crash
- Part I The Economics of Financial Inflation
- 2 Money in Globalised Times
- 3 Neo-Liberalism and International Finance
- 4 Financial Innovation: Better Machines for Financial Inflation?
- 5 The Inflation of Goodwill
- 6 Leverage and Balance Sheet Inflation
- 7 Inflation in Financial Markets
- 8 Asset Inflation and Deflation
- Part II The Culture of Financial Inflation
- Part III Financial Crisis
- Epilogue
- Notes
- Index
Summary
The terms ‘leverage’ (or its UK equivalent ‘gearing’) and ‘deleveraging’ have acquired renewed currency with the crisis that broke out in 2007. Leverage is the indebtedness of a company, or the process of increasing the indebtedness of a company (as in the phrase ‘highly leveraged company’ or ‘acquiring leverage’). It is usually measured by one of two ‘gearing’ ratios. Capital or financial gearing is the amount of debt that a company has relative to its total capital. Alternatively, income gearing is the ratio of a company's debt to its total income.
Until the twentieth century, income gearing was the common measure of leverage. This reflected a corporate practice in which the only possible gainful use of debt, that is, aside from its traditional unproductive use in financing consumption or government, was to finance commerce or industry. It followed that the key indicator in determining the amount of borrowing was the possible income that it might generate in trade or production.
With the emergence of active markets in corporate finance, towards the end of the nineteenth century in Britain and the United States, the scope for the gainful employment of leverage extended beyond commerce and industry, and into the capital market itself. Once that market became sufficiently large, the return from profitable trade in it was determined by the total amount of capital that could be turned over in that market.
- Type
- Chapter
- Information
- Why the World Economy Needs a Financial Crash and Other Critical Essays on Finance and Financial Economics , pp. 39 - 42Publisher: Anthem PressPrint publication year: 2010