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How Much Longer Must This Deleveraging Process Go On?

deleveraging:
Leveraging by investment banks creates investment money at multiples of the "real money"--money that somebody had which they didn't have to pay back to someone else because it was "owned" money, not "owed" money--that is locked up in those banks' capital. If on average these banks leveraged at 20:1 then there is 20 times more 'investment bank dollars' in the system than there is "real" US dollars (capital) with which to redeem them. All the investment bank dollars are debt, and they cease to exist when the debts are repaid, and you can't pay redemptions with money that has ceased to exist.

The "leveraging" is "borrowing money", and the money has to be paid back sometime, so it's "temporary money", not real money that somebody has and doesn't owe back to anyone. You can't pay somebody back with money you borrowed and which you yourself have to pay back. Not indefinitely, anyway.

So if an investment bank at 20:1 is liquidated, all of its assets will only be able to collect 5% of their current inflated valuation in real money. It's fun to value your assets at 20 times what anyone with real money can actually pay for them, but it was only ever a bubble inflated by pumping the levers and creating temporary money more commonly called "debt". Once everyone repays their debt you have 100% deleveraging, and you find all that is left is the original amount of capital that you started with. The bubble money evaporated when principal balances on the investment banks loans were paid down to zero.

The same principle applies to inflated stock prices. If we assume people buy stocks with real money that they actually own, not loans which are creations of new money and which have to be repaid, there is only so much total "owned money" in the stock market or available to the market.

Somebody makes a high price trade of a few shares of every stock on the market and Poof! Every share of that stock is now "valued" at the high price. But as soon as all those owners of high-priced stock try to sell, they find there isn't enough money available for everyone to cash out at the higher prices. If stock buyers initially put $1 billion of real money into stocks, and a small fraction of high priced trades raises the total "valuation" of the market to $5 billion, that does not mean there is $5 billion of "money" to pay those prices.

The gains are illusory, except for the fortunate few who manage to sell high. But everybody cannot sell high, which is why all Ponzis have to deflate. You can't get more "money" out of a market than the amount of money you put in.