How painful is the "deleveraging" process after a crisis?

Alright, let me break this down for you. Don't let the term "deleveraging" sound too high-brow; simply put, it means "paying off debt." But it's not as simple as paying off your credit card or mortgage. It's when an entire society collectively repays debt after a major crisis. And that process is far from ordinary pain.

Let's start with a simple analogy:

Imagine you discover that flipping houses is very profitable. You have 1 million in hand, but you feel it's not enough. So you borrow from banks, friends, and various sources, accumulating 9 million, and use that 10 million to buy several properties. At this point, your "leverage" is 10 times.

Everything seems wonderful until one day, the housing market suddenly crashes, and prices are cut in half. Your 10 million worth of properties are now only worth 5 million.

But the problem is, the 9 million you borrowed hasn't shrunk by a single penny; you still have to pay it back.

At this point, you have to start "deleveraging." How do you do it?

1. Selling off assets, even if it means sacrificing everything: You must sell your properties. But because everyone is rushing to sell, prices fall even further. You might end up selling for only 4 million.
2. Tightening your belt to repay debt: After selling the properties, you still owe banks and friends 5 million. There's no choice but to work tirelessly, live frugally, avoid travel, avoid eating out, and use all your money to repay debt.

Isn't this process extremely painful for you personally? Your assets are gone, you're saddled with debt, and your living standards plummet.

Deleveraging After a Crisis: A Society's Collective Agony

Now, let's scale the above example to an entire society. This is what deleveraging after a crisis looks like. Its pain is primarily reflected in these aspects:

1. Asset Prices Plummet, Wealth Shrinks Dramatically (Balance Sheet Recession)

When a crisis hits, asset prices, such as stocks and real estate, are the first to bear the brunt. Previously, everyone aggressively bought with leverage, pushing prices to absurd highs. After the crisis, people are scared out of their wits and start frantically selling, leading to an avalanche of price drops.

• For Individuals: They watch helplessly as more than half of their half-a-lifetime's savings (houses, stocks) evaporate within days, yet bank loans cannot be reduced by a single cent. Many go from "middle class" to "debt-ridden" overnight.
• For Businesses: Company assets also shrink, and financial conditions rapidly deteriorate.

2. Consumption and Investment Contract Across the Board, Economy Stagnates

Because everyone is burdened with debt or fears unemployment, the first reaction is to "clutch their wallets."

• Individuals Stop Consuming: They used to change phones every month; now they use one phone for five years. They used to eat out every meal; now they cook every meal themselves. Societal consumption demand freezes instantly.
• Businesses Stop Investing: Seeing that goods aren't selling, business owners aren't foolish; they certainly won't spend money to expand production or open new factories. Not only do they stop investing, but to survive, they'll do one thing – lay off employees.

This forms a vicious cycle: Individuals don't consume -> Businesses can't sell goods -> Businesses lay off/cut salaries -> Individuals have even less money to consume. The entire economy gets stuck in a quagmire.

3. Unemployment Soars, Social Problems Intensify

To protect themselves, companies find layoffs to be the most direct and effective method. Thus, you'll see daily news reports about major companies laying off thousands or tens of thousands of people.

• A large number of unemployed people flood society, making job searching extremely difficult.
• Many families lose their source of income due to unemployment, cannot even afford their mortgage payments, their homes are repossessed by banks, leaving them homeless (very common during the 2008 US subprime mortgage crisis).
• Factors of social instability increase.

4. Banks Reluctant to Lend, Credit Freezes

Deleveraging is also a nightmare for banks. With a large number of individuals and businesses unable to repay their debts, banks accumulate a huge pile of bad debts (non-performing loans).

To protect themselves, banks become extremely cautious and dare not lend money anymore. Even high-quality businesses that want to borrow money to operate well find it very difficult to get funds from banks. This is called a "credit crunch" or "credit tightening."

This is like the economy's "blood" (capital) being frozen, unable to be delivered to the organs that need it (businesses and individuals), and economic activity naturally grinds to a halt.

In Summary, How Painful Is This Process?

You can imagine it as a severely ill person undergoing a painful "bone-scraping to cure poison" treatment.

• At the Individual Level: Wealth is wiped out, living standards regress by several, even more than ten, years.
• At the Business Level: Bankruptcies, waves of layoffs, stagnation in innovation and development.
• At the National Level: Deep economic recession, high unemployment rates, government financial difficulties.

This process usually doesn't end in one or two years. Historically, major deleveraging cycles, such as Japan's "Lost Decades" or the long recovery period for the US and Europe after the 2008 financial crisis, have lasted for a very long time.

It is a necessary process to squeeze out the bubbles and toxins within the economy, allowing everyone to return to a healthy, sustainable path. But for every business and every family caught in it, it is undoubtedly a long and agonizing period.