Expert Commentary

Spluttering Engines Debt Deflation

Reality is biting at previously high-flying companies.

"There are only three sports," Ernest Hemingway once said. "Mountaineering, bull fighting and motorsport. The rest are merely games." In other words, only something you have a high probability of dying from should be considered a "sport." Well, motorsport itself might not be dying, but it's coming under severe strain.

According to a Bloomberg report, McLaren Automotive, the luxury sports-car manufacturer and Formula 1 team, is considering selling its iconic headquarters, pictured below, in a desperate attempt to raise cash to pay down debt. Having suffered a dramatic decline in revenue this year, the company is trying hard to bolster its balance sheet.

This is classic debt deflation. When social mood turns negative and the economy declines, debt-laden corporations resort to trying to sell off any asset they have (including the family silver) in order to raise cash. In a debt-deflation spiral, no buyers can be found and so the price of the asset being sold is reduced, leading to an even greater debt burden.

Motorsports and professional "games" such as soccer, where player transfer prices are deflating rapidly, are finding out how quickly the apparent land of milk and honey can turn to a dustbowl.

The Yin & Yang of the economic cycle.

200911 - MG