Demystifying financial leverage
bam.kalzumeus.com
bam.kalzumeus.com
There is no single leverage ratio [1]. On an asset basis, this is an 11:1 leverage ratio, i.e. $11 of assets for each dollar of equity. A lot of miscommunication around leverage seems to stem from this ambiguity.
[1] https://corporatefinanceinstitute.com/resources/accounting/l...
However, later he says that a home owner with a down payment of 20% is levered 5:1. Yet, if we do the same math as he did above, then 20% of $100,000 loan is $20k in equity with an $80k loan, giving a leverage ratio of 4:1.
Later he uses the example of purchasing $2000 worth of ($10) stock by paying just $1000 and having the other thousand lent by the brokerage.
As per his definition, $2000 in stocks (assets) minus the $1000 loan (liability) equals $1000 in equity. Then if leverage = equity/liability, in this case it turns out to be 1:1
His explanation doesn't make sense to me. Are those assets borrowed or something? And having $10 million extra in assets means that if suddenly all your liabilities come due, you have $10m left over? How could that possibly wipe you out?
Very confused.
Debt to equity. $10 of debt for every dollar of equity.
Equity (in accounting) is assets minus liabilities. $110mm assets, $100mm liabilities and thus $10mm equity.
You may be thinking of equities (from trading), which is another word for stock. (The link being equities represent ownership of equity, i.e. the value of a company’s assets net of liabilities.)
It seems to me that if bad things happen, you can cover for the value of your liabilities with your assets. You could waste the entire excess equity on banana monkey NFTs and still be solvent, assuming no liquidity issues.
Are the assets by definition illiquid?
so you may have started with 10M - then you borrowed (and promise to repay) 100M more. there's your 1:10 (10:100) ratio.
1. Bank A offers you 5% interest for a 1 year deposit. You deposit $100 of your own money. You are unlevered. Things go well and after a year you receive $105, a neat 5% return on your investment. Or things don't go well, bank A turns out to be a scam and you receive $0, a -100% return.
2. Bank B offers you a loan for a year for 4% interest. You borrow $900, together with your own $100 you deposit $1000 at bank A. You are levered 1:9. Things go well and after a year you receive $1050 ($1000+5% interest) from bank A, you repay bank B $936 ($900 + 4% interest), so you're left with $114, a very neat 14% return (almost triple the unlevered return). Or things don't go well, bank A turns out to be a scam and you receive $0. But now you still owe bank B $936, so together with your own $100 loss you made a -1036% return. Oops.
p.s. It's called leverage because (like a physical lever that allows you to lift something much heavier than without) supplementing your own funds with lots of borrowed money allows you to tackle something much bigger than using only your own money, like buying a house or starting a business or getting 5% on $1000 instead of on $100.
"The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets."
In the 2008 financial crisis, some have paraphrased this as "All financial innovation is leverage dressed up as something different."
But that then begs the question, what happens if the custodian goes bust? Well custodians also have a custodian, diversifying the risk one step further (but not completely). Custodian inception!
Further on this here:
https://moneykingnz.com/what-happens-to-your-money-if-invest...
Sure it's true at some level but not a useful distinction if you're a customer or vendor.
The basic underlying principle of a product/service should be communicable and relatively universal. The details are of how it's tailored to your specific situation should come with cons and unknowns in other situations.
If it's not communicable and/or sounds like there are no cons they're not being honest about what it is (intentionally or unintentionally).
I think an easy example nearly anyone can understand is their mortgage. You put down $50k for a $500k house. The house goes up just 10% to $550k, if you sell you've doubled your money after repaying the $450k you've borrowed. Of course, if the price goes down 10%, you're completely wiped out.
Amazing how time flies. I'm pretty sure anyone who was old enough to own a home in 2007/2008 in a "hot" market knows exactly how mortgage leverage can work on the downside.
Sorta... Usually when people talk about that, it's mostly in the context of balloon payments and variable rate mortgages where the value of your house dropping coincided with sudden increases to your monthly mortgage payment or large bills coming due.
Well that's the problem isn't it?
You have $100 worth of stock in Google. You think Google stock is going to appreciate so you borrow $50 of my money to buy more stock. I see that you have $100 worth of Google stock which provides me with some security that you have a valuable asset and are a worthwhile borrower.
But, instead of Google's stock value increasing it starts to fall. You took my money and I'm getting nervous so I force you to sell your Google stock. At one point you had $150 worth of Google stock but now I've forced you to sell your stock for a total of $75 which allows me to recoup my lent money ($50) plus my fees and I really don't care how much money you are left with, if any.
This is important for the economy because credit (which this is) helps create growth and drives economies - when credit is tight then economies grow slowly if at all.
You had 100 dollars, you're leveraging 50 cents for every dollar you put in giving you a .5:1 leverage ( or 50%, or 1.5/1 as a fraction)
Only if the stock loses more than 100 dollars in your equity would the broker be worried and ask for margin. This means your $150 dollars of leveraged stock would have to drop to $50 dollars before the broker would be worried and sell your stock to get their $50 back. This means your stock could drop 66,7% or 2/3 as a fraction.
All fees are paid upfront and the rest from your margin. Not your stock.
This is the piece that appears to be missing from the article, or at least from the bank example.
Pretty normal for a patio11 post.
Anyways, this is all very subjective and based on personal preference so it's probably not useful so I'll shut up now.
I appreciate that patio11 states things that might seem obvious to someone knowledgeable in a field. It reminds me of [WP:Obvious] from back when I started using Wikipedia. It states:
> State facts that may be obvious to you, but are not necessarily obvious to the reader. Usually, such a statement will be in the first sentence or two of the article.
https://en.wikipedia.org/wiki/Wikipedia:Writing_better_artic...
This is such a difficult thing to do "correctly" because there is a danger as you see on the wikipedia link that you might start stating that the sky is blue. (Meta: Did I just do that?) This is what patio11 does so well.
I mean this is pretty early on in the article:
> Every business has a balance sheet, which contrasts its assets (valuable things it owns) against liabilities (valuable things it owes to other people). The difference between assets and liabilities is equity.
> Financial businesses will frequently have non-financial assets and liabilities. Ignore those for the sake of simplicity. Ignore the nice building, the computers, the payroll due on Friday for work which has already been completed. Focus just on the financial assets and liabilities, things like “mortgages our bank owns” (asset) and “deposits from customers” (liability).
> Leverage is the ratio of your liabilities to your equity. Simple division. Fourth grade math. If you have $110 million in assets and $100 million in liabilities you, by subtraction, have $10 million in equity against your $100 million in liabilities. You are said to be levered 10:1.
Now if I were to edit this, I'd probably go off a tangent at this point. I would say something silly like You have deposits from customers worth USD 100M. You loaned out USD 110M.
What happens if, of the people you loaned your money to, half of them disappear with your money? Now, your assets are only USD 65M. However, your liabilities are still USD 100M. Your equity is USD 65M - USD 100M = a negative USD 35M! You are properly screwed.
In fact, you'd be screwed if your loans soured by anything greater than your equity of USD 10M, let say USD 11M. Lets say your borrowers are unable to repay you any more than USD 99M of the USD 110 they owe you. Your equity is USD 99M - USD 100M = - USD 1M.
What just happened? I took you, the unsuspecting reader, on my boat and threw you out in the middle of the ocean. I've done you a disservice. Did you expect to read that tangent after the quote I had from patio11? Probably not. Did you expect to see a concept like negative equity and negative leverage if you're just learning about leverage? Unlikely.
In any case, the fact that I feel dissatisfied just writing this comment is a testament to just how difficult it is to explain something. Even when the concept I am trying to explain is nothing more than "it is difficult to explain something in brief".
In the stock brokerage example, we're told:
>They might allow you 2:1 leverage when you buy stock: your $1,000 buys 20 shares now.
But then a couple of paragraphs later:
>But you now owe $1,000 to your brokerage, and are 1:1 levered
My brokerage offers 2:1 leverage, which results in me being 1:1 levered? I think I understand what patrick is saying here but I also find it hard to follow
On the other hand:
>One is that, because people can ask for money from their checking accounts at any time, impecunious operation of the bank could cause the value of the mortgages to be impaired just a tiny little bit at a time when people need most of the money in their checking accounts.
I've read this four or five times and I don't understand the chain of cause-and-effect here at all. Why does "people can ask for money from their checking accounts at any time" mean that "impecunious operation of the bank could cause the value of the mortgages to be impaired just a tiny little bit at a time when people need most of the money in their checking accounts"?
The second one is only confusing because you're trying to find a cause and effect between 2 events that simply happened to happen at the same time. Though in practice the events may have an underlying common cause and so do show up more often than you'd expect.
A concrete scenario is a community bank in a place where a major employer just did a layoff. The value of the mortgages is now impaired because some people won't be able to pay them back. The laid off people also need most of the money in their checking accounts because they have no job. The bank now has a challenge - its cash reserves don't meet anticipated needs, and it can't sell the mortgages to get more cash.
The troubled bank has a good chance of surviving unless the third leg of the trifecta shows up - word gets out about the bank's trouble. Now everyone scared of losing their checking accounts all show up to withdraw money at the same time. The bank doesn't have the cash for this "run on the bank", and goes bankrupt.
This scenario was historically common. People accepted it until there was an event during the Great Depression where enough banks went under at the same time that people got scared about what were otherwise healthy banks. Even though their assets were good, they couldn't pay out all accounts at once, and began going under en masse. FDR took fairly drastic actions to fix this (bank holiday, confiscating gold, etc) and then put in the FDIC to stop it from ever happening again.
There is a well-known portrayal of this run on the banks in the movie, It's A Wonderful Life.
The author uses "because", which in context clearly indicates to me a cause and effect relationship.
Even overlooking that, "impecunious operation of the bank could cause the value of the mortgages to be impaired" is not addressed by your explanation. You explain how external factors could reduce the value of the mortgages.
... impecunious operation of the bank could cause the value of the mortgages to be impaired just a tiny little bit at a time when people need most of the money in their checking accounts.
And probably should say something like:
... impecunious operation of the bank could cause trouble if the value of the mortgages is impaired just a tiny little bit at a time when people need most of the money in their checking accounts.
Are the 3 ways explained to cover a margin call how it works in practice? can one choose either of these 3 options?
> Fourth grade math. If you have $110 million in assets and $100 million in liabilities you are said to be levered 10:1.
Actually got some trouble on the 4th grade math ... morning coffee not working properly?
$110m assets - $100m liabilities = $10m of "surplus".
liabilities:surplus ratio is 100:10 --> 10:1.
> You’ve got $1,600 in assets against $1,000 in debt, so $600 in equity, so ~1.67:1 levered.
here liability = 1000, a better name for the surplus is "equity" at 600,
1000:600 ratio --> ~1.67:1
4th grade math checks out :)
In this case the pertinent question to ask oneself a priori is: "if, as I believe, tether breaks down what are the chances that people will be defaulting on Defi platforms thus turning my clever trade in a catastrophe where I lose my principal?"
This is what traders call "wrong way risk" - your trade becomes self-defeating. An example.od this from real life is JPY cross currency basis swaps. A cross currency basis swap consists of 2 back to back loans in different currencies. Japanese investors have excess JPY and seek to convert it to USD via this mechanism so they can buy higher yielding assets in USD. Cross currency basis swaps attract a premium, in this case as the flows are predominantly lending JPY, the lenders get a lower interest rate than the prevailing market rate. The problem arises if you are a US or European bank and wish to do this trade with a Japanese bank. If there is a JPY crisis the premium will become even more negative as Japanese entities scramble to get USD in to meet liabilities by lending JPY. As the foreign bank you will have a mark-to-market profit on the JPY you lent but your Japanese counterparty may well be unable to pay due to the unfolding crisis in Japan.
I am extremely aware counterparty risk in DeFi protocols, which is why I have a toy-sized position and only put that on once someone explained to me, persuasively, that in futures where DeFi explodes I will gain more utility from the story than I will lose from a toy-sized position. I have sometime sardonically referred to this as 'mining comedy gold.'
This is also why, when people ask me how to short Tether, I try my darndest to avoid blessing any particular mechanism, because you can be right and still lose everything, as you're aware. I have been saying that on HN since before DeFi existed as a concept.
> "Well, as you probably know, over the last 36 to 40 months, the firm has begun packaging new mortgage-backed security products that combine several different tranches of rating classification in one tradeable security. This has been enormously profitable... Well, the firm is currently doing a considerable amount of this business every day. Now the problem, which is I guess why we are here tonight, is that it takes us, the firm, about a month to layer these products correctly, thereby posing a challenge from a risk management standpoint... Well, we have to hold these assets on our books longer than we might ideally like to. But the key factor here is, these are essentially just mortgages, so that has allowed us to push the leverage considerably beyond what you might be willing or allowed to do, in any other circumstance, thereby pushing the risk profile without raising any red flags."
Running the money printing press was the government response to that situation, i.e. 'deleveraging the bank holding companies (BHCs) via quantitative easing' - which does illustrate how a government controlled by financial oligarchs operates in practice. The actual homeowners could have been the recipients of the bailouts - i.e. the government would have taken over their loans, provided a zero-interest period, converted the loans from adjustable to fixed-rate, sold them back to the banks (or just set up a separate institution), and then the homeowners could have stayed in their homes and continued to pay off their mortgages at an acceptable monthly rate - or some combination of the above. The BHCs would have suffered much more significant losses under that scenario, and perhaps more would have gone the way of Bear Stearns and Countrywide.
Notably, this illustrates that regardless of whether monetary policy is tight or loose, the government's fiscal policy can be engineered to support the financial oligarchs. For example, today's high interest rates are going to be used to justify government fiscal policies that benefit the oligarch class (i.e. pushing for mass unemployment to bring down wages to 'fight inflation', etc.). Similarly, large banks are not being forced to raise personal savings interest rates as the Fed rate rises (as that would benefit ordinary people, even if inflation is outpacing interest rates).
https://thehill.com/policy/3656474-lawmakers-slam-big-bank-c...
As far as cryptocurrencies, it seems fairly unlikely that crypto funds will be the beneficiaries of quantitive easing or other government largesse, as crypto hasn't yet bought enough corrupt politicians.
Isn't that only if the homeowner has no other equity or liabilities? Which is especially tricky when talking about people who, if we valued them like we value corporations, have equity in the form of the net present value of their future earnings.
The “book value” of equity according to accounting is just (assets - liabilities) and doesn’t include the company’s own future earnings. That’s what’s discussed in the article. Stock is also referred to as equity and its market value is whatever the market believes a company is worth and presumably does include future earnings according to whatever crystal ball it uses.
In this case we assume a house (valued at its purchase price) is the only asset. I get 4:1 though, assuming debt:equity.
It’s simple math, but definitions can be tricky and the article would be a whole lot clearer if he showed his work.
There are numerous real-life scenarios where a house is worth zero dollars.
This is not always true. (Trivially: your land is declared a superfund site. Less trivially: fire sale.)
> there are never situations where the value of the house is worth zero
I guess a decade and a half is all it takes to forget.
This varies jurisdiction to jurisdiction. And it isn't really germane to the question of quantifying one's leverage, which is a going-concern analysis.
But then don't we need to get into evaluating future earnings?
Yes, many flow leverage ratios look at this, e.g. interest to Ebit.
This is why mortgage lenders test your debt burden and interest cost against income.
https://twitter.com/dharmatrade/status/1553059401975533568?t...
Video demo:
Read the Federal Reserve's on words on what they 'guide' banks to do with deposited funds:
> The Federal Reserve is carefully monitoring credit markets and is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Following the "quacks like a duck" rule, a fractional reserve 'policy' and 'using leverage' look very similar. Both root in criminal misuse of deposited funds.
There is nothing new under the sun:
Leverage, fractional reserve banking, and most of the shenanigans in crypto are all violations of the legal principles governing the monetary irregular-deposit contract.
I _love_ reading anything new by patio11, so absolutely just took a long break from my day to read this and leave the comment. Thanks much! Looking forward to the next BAM!
Leverage is deeper and more pervasive than fractional-reserve banking. Leveraged merchants going bust was commonplace in the days of hard money.
I would focus on investing, particularly defensive investing.
1. 'The Intelligent Investor' By Benjamin Graham 2. 'David F. Swensen' Unconventional Success: A Fundamental Approach to Personal Investment
If you want the easiest allocation possible put some portion of your paycheck in an S&P500 fund and in 40 years you should have enough for retirement.
Good luck!
But it’s just a data point… gotta do your research.
This is not at all how modern banking works!
> Leverage is the ratio of your liabilities to your equity. Simple division. Fourth grade math. If you have $110 million in assets and $100 million in liabilities you, by subtraction, have $10 million in equity against your $100 million in liabilities. You are said to be levered 10:1.
how are you levered 10:1 when assets > liabilities? really feel like i am missing something.
You’re levered 10:1 because you have $100 in borrowed assets you have to pay back and only $10 million in assets you fully own.
Shouldn’t this be 4:1 @patio11 ?
Or would you say that you're against the idea of borrowing against stocks specifically?
What has happened with FTX is a demonstration of the value of a block chain and the concept of user-controlled wallets versus banks. FTX did what banks do, which is to take a cut of transactions, and especially use customer funds to make bets (that eventually they could not cover, even with all of your funds).
Using centralized exchanges to speculate is a ridiculous perversion of the concepts in cryptocurrency.
The basic advances of cryptocurrency are:
1) digital signatures used in transactions rather than disclosing secrets such as credit card numbers
and
2) a public ledger that is cryptographically verified with chains of blocks
Decentralized exchanges are probably usually also often nonsense speculation, but if done right they can at least benefit from 2 which means you can see what they are doing and not be surprised at the last second about some secret "over-leveraging".
Their terms of service didn't give them the right to do this, as I understand it.
> None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading;
Because actually the idea is that instead of relying on some third party to follow some words on paper, you trust math and computer science. You don't need the third party at all for most things, just use you own cryptocurrency wallet.
For more complex things, we can use smart contracts, which are not based on trust but actual math. The program being on-chain literally makes it impossible for them to misappropriate funds (at least without the details being in public and reviewable beforehand).
I couldn't make this up!
As for the "smart contracts", nobody who is familiar with programming bugs would want there not to be better checks and balances there. The depressing frequency of 8 figure hacks of the terms of said contracts is a concrete demonstration of this principle. Thanks, but no thanks in anything like its current state.
For most users, traditional finance is faster, cheaper, and safer in practice than crypto. Which is exactly why the main use cases for crypto are speculation, money laundering, and various illegal activities like paying ransoms for ransomware attacks.
There is constant abuse of customer funds, as a matter of course, by banks. It generally is less public or visible though than public ledgers (blockchains).
Its the difference between trusting a company that is trying to profit just from holding your funds in ways that you cannot audit, versus trusting a math and computer programs that you can audit.
There have not been more abuses by cryptocurrency exchanges than banks overall. They are just more recent. But what I am saying is that these cryptocurrency exchange companies really don't have anything to do with cryptocurrency -- their business model is antithetical.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
The banks have a zero-percent reserve ratio allowing them to "loan out" (and have deposited in their own bank as new funds) 100% of the 'digital assets' in their account.
Likewise we have had to rely on banks to control digital money since we did not have a good alternative. And now there are many regulations and compliance officers etc. dedicated to preventing people from cheating, stealing, or irresponsibly using customer funds.
But at the core level the problem is that these the bank ledgers are secret, difficult to verify or connect together for tracing purposes. Cryptocurrency means using math and computer science to solve these types of problems in a holistic way.
Like everything else, people have abused this technology (such as using it to sell services that are antithetical to the core concept). But that doesn't mean they aren't important advances.
There wouldn't be anything inherently wrong with it 1) if they didn't do it by default 2) if banks informed their customers appropriately, including the risk in doing that (most people don't know what banks do with their funds) and especially 3) if it wouldn't be forced, i.e. if they would let customers choose to keep their funds segregated if they are not willing to take the inherent risk in lending and/or the bank mismanaging their funds (e.g. having the option to have both segregated and normal checking/savings accounts or whatever), so that customers would never be exposed to losing whatever amount they didn't want to (including anything above the FDIC insured amount).
But sure, allow customers to lend their money and expand the economy if they want to. With an appropriate reward for the risk, not a laughable 0% interest rate, which almost nobody would ever take willingly. In fact, the 0% interest rate, or anything below or close to the inflation rate, is a clue which indicates that what they're doing to their customers is wrong and that the customers aren't choosing to take that risk knowingly and voluntarily.
> There are a mountain of regulations that banks have to keep up with and the reason why FDIC insurance exists
You say that like it's a good thing. It's massively inefficient and both "a mountain of regulations" and FDIC insurance are inherently unfair (for several reasons) and have many unintended (negative) consequences.
And it doesn't even actually fix the problem, it just makes it less likely to occur (for starters, because there ends up being much less competition than there would be otherwise -- less banks, less bank failures) but when it occurs, it's an even bigger problem. Which means it also gives a false sense of security.
Credit cards also offer this. I can go to my CC's website and generate virtual cards which can be handed to vendors and individually managed, frozen, or deleted, all without exposing my actual card number.
Still harder and not as secure as a digital signature.
> Furthermore, I'm not worried about a virtual card being exposed to unauthorized charges, because (unlike in cryptocurrency-land) chargebacks exist.
You're not guaranteed to perform a chargeback successfully. And both vendors and customers (like you) are paying for that "service".
Chargebacks are also one of the reasons for why there is large-scale credit card fraud. And it is also why vendors are incentivized to collect personal information from you (to detect fraud before chargeback happens, for which they are greatly penalized) and why they are also incentivized to refuse service to legitimate customers in many cases (due to flagging legitimate transactions as suspicious).
Worse, when they refuse service they cannot even tell you why (as that would help fraudsters).
Even in the worst case, because a credit card is an abstraction over my bank account, I have the option to refuse to pay and won't lose my shirt or otherwise become despondent. In the meantime, chargebacks are a feature of the system, not a bug. To wit, cryptocurrency advocates are the last people who should go around lecturing others about fraud. :P
That may also have unintended consequences for victims of credit card insecurity.
> To wit, cryptocurrency advocates are the last people who should go around lecturing others about fraud. :P
Why not? Cryptocurrency advocates know a lot more about it than most people (for good and bad reasons).
> Since token approval requests usually ask for unlimited access to your token balance, if there is a security vulnerability, all of the assets in your wallet could be exposed. Depending on how severe the security vulnerability is, disconnecting your wallet from a dapp may not be enough to fully protect your assets.
https://help.coinbase.com/en/wallet/security/dapp-permission...
Such as the fact that most of these cryptocurrencies are totally impractical to use for actually buying things, leading to the need to use centralized exchanges for swapping to fiat.
And the fact that there are multitudes of competing cryptocurrencies. And that there is a fundamental lack of integration with government due to government actually needing to radically reform and advance to incorporate cryptocurrency.
But still, they are core advancements that society should take advantage of. Easier said than done.
No, it's pretentious BS used to make more riskier, assymmetric gambles.
You promise you'll fix Johnny's roof for $200. He hooks you up with a computer for $300. You pay him the difference of $100. You have transacted for $500 but only circulated money of $100. That's 5:1 leverage.
Futures markets work on this principle, among many other things.
You're alluding to operating leverage [1]. The carrying cost of the computer and cost of services for the labor being working capital constituents.
This is distinct from the financial leverage, which deals with explicit borrowing. (Futures markets do not work on operating leverage. They work on offsetting financially-levered claims.)
What I'm saying is that when you separate the action (fixing roof, hooking up with computer) from the payment, you're in debt, you're creating an implicit loan.
If you then clear this debt not by opposing transactions but with just the minimal set of transactions (similar to ring clearing after a poker game) then you have allowed transactions with far more money than any party actually produced cash for.
That is financial leverage.
That is exactly what happens in future markets, too. You don't need cash corresponding to the full value of a 5000 bu wheat contract to buy one. All you need is enough to cover the mark-to-market payments and then a little safety buffer. It's all an implicit loan until the contract expires. If you offset it, you continue to transact in way more money than you put in. Financial leverage!
I linked to an admittedly terrible Wikipedia article. What you're describing involves leveraging working capital, a form of operational leverage. Every business does this. Restaurants are operationally levered--they serve you food before you pay. In your example, services were rendered in anticipation of payment. None of this is financial leverage.
> offset it, you continue to transact in way more money than you put in
This is netting. The loan is explicit in a way distinct from operating leverage. These differences are meaningful in both how we measure the phenomena as well as the law.
Financial leverage happens if you and the restaurant would begin to clear debts in ways that mean you can enter into business for larger amounts than the cash you can pony up.
(Even though your didn't use cash, barter transactions are still taxed at their fair market value)
EDIT: Never mind, I missed where you said that the roof fixing will happen later in the future.
Not widely known, but it's the US Federal Reserve that tells stock brokers how much leverage their clients are allowed to assume. This is one of the most potent tools in the Fed's toolbox, and it has not used it since 1974:
https://www.frbsf.org/economic-research/publications/economi...
Forget the sissy Fed funds rates, forget the lamo QE/QT ceremony, if the Fed really wanted to take compulsive gamblers to the woodshed, all it needs to do is raise the margin requirement, thus de-leveraging brokerage customers by force.
Whenever the topic of hash-related gambling catastrophes comes up, there's always an outcry for MOAR REGULATION.
If history had demonstrated that regulators not only knew when to use their tools but that they could wield them in a wise and timely manner, that would be one thing. But time and again regulators do the wrong thing at the wrong time.
Most companies use leverage so their c-suite can make more while producing less. That's the truth. It's bullshit and should be outlawed. Corporations need to compete based on inputs and outputs.
Labor creates value. Leverage creates a mirage. Feel free to disagree. Enjoy your business cycles.