Aug 11, 2026 · 9 min
Leverage can turn a market dip into a forced-selling spiral
Borrowing money to invest! What could go wrong?
Record U.S. margin debt and rising use of leveraged ETFs raise risks that ordinary declines could become self-reinforcing losses.
- 1Borrowed money magnifies gains, but falling assets can force investors to sell or deposit more cash.
- 2Evidence from India and South Korea shows margin calls can deepen market declines even when underlying companies remain strong.
- 3Elevated U.S. leverage warrants caution, but the episode finds no clear reason to expect an imminent crisis or Fed rescue.
Don't miss
The South Korean unwind shows hundreds of thousands of accounts forced to sell after leveraged bets reversed, despite strong underlying chip companies.
The brief
Margin trading lets investors buy more assets with borrowed money, but the loan remains due when prices fall. That mismatch turns a routine decline into a test of who can keep funding the bet.
A Yale finance professor explains the two choices after a leveraged position drops: sell assets or add cash. Evidence from India shows forced selling can amplify losses across a market.
South Korea offers a sharper example: enthusiasm for Samsung and SK Hynix fed leveraged single-stock ETF trading, then magnified losses when the semiconductor trade reversed.
The resulting margin calls forced hundreds of thousands of accounts to liquidate, with younger investors especially affected—even though the underlying chip companies remained fundamentally strong.
Record U.S. margin debt and growing leveraged-ETF use create a comparable vulnerability, but the episode’s conclusion is a yellow zone, not an imminent crisis requiring Fed intervention.
Featuring
India
United States
Yale UniversityListen to the full episode and explore every guest, topic, and moment on PodLume.