Leverage Cycle

The leverage cycle refers to the cyclical pattern of rising and falling leverage in financial markets. During periods of economic expansion, borrowers and investors tend to increase leverage, borrowing more to finance investments, leading to higher asset prices and economic growth. However, as leverage reaches unsustainable levels, the cycle reverses, with asset prices declining, credit tightening, and deleveraging occurring. The leverage cycle can lead to boom-bust scenarios, as seen in the 2007–2008 financial crisis.

Example

Before the 2008 financial crisis, excessive leverage in the housing market led to a boom in property prices, followed by a sharp downturn as borrowers were forced to deleverage.