There is an eerie moment before a tsunami hits when the water retreats from the beach. The water is sucked out to sea, leaving the fish flapping and the seaweed exposed as the tsunami gathers itself before rushing in to destroy all in its path.

In years to come, investors and economists alike will see this year as
the year debt was sucked back out of the world's thriving financial and
property markets.

This year will be seen as that moment before the tsunami of the worst
recession in 80 years wreaked havoc on the global economy for at least
the next decade.

It's worth explaining how de-leveraging works and why it is such a powerful force.

Over the past six years interest rates were kept low globally in the wake of the 9/11 attacks and investment banks in the Northern
Hemisphere were let off the leash to indulge in massively leveraged
lending to all and sundry for all sorts of assets.

The most popular type of lending was home mortgage lending to consumers by banks and pension funds either directly or through a number of intermediaries using securitisation and "insured" lending backed by
investment banks and insurers using strong credit ratings.

The power of that leverage was enormous. It doubled house prices in
most Western property markets over that six-year period.

Estimates vary about how much borrowed money was pumped into property
markets over that period. Some estimate it was at least US$3 trillion ($5.8 trillion).

Others point to the value of Credit Default Swap instruments outstanding at the end of last year of US$600 trillion as a fair estimate.

I think a number closer to US$15 trillion is more accurate.

That is about 534 times New Zealand's annual GDP. It's a number too big to comprehend.

But what we're seeing now is a good portion of that money being sucked back out of the property market either through force or through debt not being rolled over.

Sucking the money back by force through mortgagee sales, foreclosures and liquidations is the most dangerous type of de-leveraging.

This is what has caused so much havoc on global financial markets in the past six months.

The de-leveraging debt spiral goes like this.