Deleveraging Contraction Cycle

Mechanism

When debt burdens become too large, borrowers cut spending, incomes fall, credit availability contracts, asset prices fall, collateral weakens, and borrowers become less creditworthy.

Forced asset sales can push prices lower, worsening collateral values and bank stress. Unlike an ordinary recession, lowering interest rates may no longer work if rates are already near zero and borrowers do not want or cannot support more debt.

Source Support

Dalio explains deleveraging and its self-reinforcing contraction around 00:16:30-00:19:12.

Why It Matters

This mechanism distinguishes ordinary recession from balance-sheet stress. It explains why policy tools that work in normal credit cycles can fail when debt burdens are already too high.

Boundaries

The source combines households, businesses, banks, governments, and asset markets into one simplified cycle. Applied use should separate sectors and balance sheets.