To sum it up to the fullest, and not spend more than necessary on words, I will say that leverage is investing with borrowed money. In this way, we multiply the amount of our investment, as well as the benefits obtained in case this is successful.
But there is also the other side of the coin, the one that nobody wants to hear about, and that just as our profits can multiply, so can our losses, leaving us on our knees before the interests of the creditor.
If I have 100 euros and I leverage 100, I can invest with 10,000.In this way, a 5% increase will give a profit of € 500. But, if instead of this rise there was a fall, it would be € 500 that we would lose .
As if that were not enough, leverage as a custom is something that profoundly affects the functioning of the economy, since it consists in the falsification of large-scale money. If an individual like the one in the previous example gets € 500 with an initial capital of 100, he is taking money out of the system without having produced anything. The same thing happens with the bank, which injects the interest of the loan into its balance sheet. In bullish periods, where profits predominate, profits and bubbles swell to reach stratospheric levels.
Then come the falls, failed investments and those bottomless debt wells to be paid by society. In that we are now: paying for the 30-year party of neoliberalism and monetarism, where deregulation and the power of economic criminals, eventually rot the roots of the economy.
That tree, which is our societies and is our world, is poisoned for life. It is not possible to make any patch, beyond logging and regeneration attempt. The uncertainty is, in itself soils and undergrowth have been infected. In itself you can cure this pandemic.