Why is the Capital Leverage Threshold High?

Okay, this is a great question. Let's break it down in plain language.

Why is the Barrier to Financial Leverage So High? A Plain Explanation

Imagine you want to pry up a huge boulder weighing a thousand pounds (jin), but all you have is a small rock. In this situation, you need a long, sturdy wooden pole as a "lever" and a solid fulcrum. With these, you can move the immense rock using just a little force.

In the financial world, financial leverage is that "wooden pole".

Your money (capital): This is like the small amount of strength you use to push down.
Leverage (borrowed money): This is the pole that amplifies your strength.
The investment (e.g., buying a house, trading stocks): That's the massive rock you're trying to move.

Using other people's money (borrowed funds) to help you make more money – that's financial leverage. Sounds wonderful, right? But think about it: what happens if that "pole" breaks, or the fulcrum slips?

— That massive rock will come crashing down on you with tremendous force, crushing you.

This is the core reason why the barrier to using financial leverage is so high. Let's break it down:

1. Core Reason: Risk is Amplified in Both Directions (It's a Double-Edged Sword)

The most attractive thing about leverage is that it amplifies your profits. But, at the same time, it amplifies your losses by the same multiple.

Take the most common example: Getting a mortgage to buy a home.

You have 200,000 yuan. You find a house costing 1,000,000 yuan.
You borrow 800,000 yuan from the bank (this is the leverage). You are using 5x leverage (1,000,000 yuan / 200,000 yuan).

Scenario One: You Win The house price increases by 20%, so the house is now worth 1,200,000 yuan. You sell the house, pay back the 800,000 yuan loan, and have 400,000 yuan left. Your initial capital was 200,000 yuan, now it's 400,000 yuan – that's a 100% return! While the house price itself only rose 20%. See? Leverage amplified your gain by 5 times.

Scenario Two: You Lose The house price drops by 20%, so the house is now only worth 800,000 yuan. If you sell it now, the proceeds just barely cover paying back the bank's 800,000 yuan loan. What about your 200,000 yuan principal? It's gone completely, a -100% return. The house price only fell by 20%, yet your initial capital vanished.

An Even Worse Scenario: If the house price drops by 30%, the house is only worth 700,000 yuan. You sell the house but still owe the bank 100,000 yuan. Not only have you lost your entire capital, but you’re also saddled with new debt.

See? Leverage is a razor-sharp double-edged sword. The person who gives you the pole (the bank, financial institution) must ensure you don’t get crushed by the rock, because if you "die", their money is lost too. Therefore, they must set barriers.

2. Who Gives You the "Leverage"? — Money Doesn't Grow on Trees

The people providing you with the "pole" (i.e., lending you money) – like banks, brokerages, investment firms – are not charities. Their money also belongs to depositors and shareholders, and their primary concern is the safety of their funds.

Put yourself in their shoes: why would they trust you with a large sum of money to "move the rock"? They need to set barriers to screen out high-risk individuals:

Your Credit/Reputation: Have you repaid past loans on time? Any bad records? You need to prove you're reliable – the basic character barrier.
Your Collateral: What valuable assets can you pledge to me? Real estate, stocks, or other valuable assets. If you mess up, I can at least sell your collateral to cover my losses. This is the most practical, material barrier.
Your Knowledge & Skill: Especially in complex derivatives markets, do you understand what you're doing? Do you grasp the risks involved? Brokers impose tests and asset requirements to ensure you're not a reckless novice waving around a rocket launcher. This is the professional barrier.

These three barriers essentially assess your risk tolerance and repayment capacity. The higher the barrier, the heavier the "rock" you're trying to move and the greater the potential danger.

3. Society's "Safety Valve": Financial Regulations

If it were only individual bankruptcies, it would be manageable. But what happens when many people and institutions pile on excessive leverage?

Remember the global financial crisis of 2008? Its root cause was excessive leverage added to the US housing market (subprime mortgages). When the leverage snapped, the dominoes fell. Giants like Lehman Brothers collapsed, triggering a global economic recession.

Since then, governments and regulators worldwide have been wary. They established strict regulations to act as a "safety valve" for the entire financial system.

Higher Capital Adequacy Ratios: Require banks to hold significantly more of their "own money," preventing them from leveraging excessively.
Investor Suitability Rules: Not everyone gets to buy high-risk financial products. You must prove you have sufficient funds and knowledge to "join the game."
Leverage Ratio Limits: Directly capping how much leverage can be used for certain investments (like stock index futures).

These regulations forcibly raise barriers to capital leverage at the societal level. The goal is simple: to prevent one person's reckless gamble from dragging everyone down and causing a systemic collapse.

4. Naval's Perspective: "Permissioned" Leverage

You mentioned Naval Ravikant, which touches on a core idea in his philosophy. Naval categorizes leverage into two types:

Permissioned Leverage:
- Labor: Requires someone to hire you.
- Capital: Requires someone to invest in you or lend you money. This is the type we're discussing. It requires "permission" because you're using others' resources (their labor or money). All the barriers mentioned earlier – credit, collateral, regulation – are essentially about obtaining this "permission."
Permissionless Leverage:
- Code: You can create software to serve innumerable people without needing anyone's permission.
- Media: You can write an article, record a podcast, or make a video to reach countless people, also without needing permission.

Naval advocates for "permissionless leverage" because it has a very low barrier to entry, and the risk is primarily your own time and effort, not the devastating financial risk of losing everything.

So, from Naval's viewpoint, the high barrier to capital leverage is inherent because it belongs to the "permissioned" category. To use it, you must pass someone else's vetting and abide by their rules.

To summarize

The barrier to using financial leverage is high primarily because:

The Risk is Huge: It can make you immensely wealthy overnight, but can also make you destitute instantly, or even leave you buried in debt.
Fund Providers Demand Safety: Those lending you money need assurances they'll get it back safely.
Society Demands Stability: Regulators act to prevent widespread financial risk and systemic crises.
Its Inherent Nature: It's a "permissioned" tool; you must meet the criteria to gain access.

Therefore, the high barrier to capital leverage exists fundamentally to manage enormous risks. It's an "adult's game," requiring strict entry rules to protect players and the entire financial system. For us ordinary people, understanding this can help foster greater respect for risk, a more rational view of wealth and opportunity, and even guide us toward seeking out our own, lower-barrier forms of "permissionless leverage."