Condition: Reduced Use of Financial Leverage
Banks are unwilling to lend, and borrowers are unwilling to borrow; both parties wish to derisk their balance sheets, having learned lessons about risk the hard way during the financial crisis.
Lowered Investment Returns
A nation that can no longer turbo-charge its economy through the use of financial leverage will experience some degree of slowing in the nominal growth rate of its economy. In other words, the actual level of spending the country experiences will be constrained by a lack of credit availability and a reduced willingness to spend, along with a higher personal savings rate. Moreover, having reached the last balance sheet, government spending will be restrained, too. In response to these realities, businesses will spend cautiously. Combined, these behaviors will translate into a lower rate of growth in overall spending and in many cases an outright decline when austerity measures by necessity are large. Slower growth rates in overall spending result in slow growth in revenue, the lifeline for corporate profits, weakening the prospect for investment returns in corporate equities. It also puts some corporate bonds at risk because cash flow is what is needed to meet payment obligations. Investment returns are damped also by a lack of corporate pricing power, which thins profit margins.