Yes, the leverage *becomes* the bigger problem...after...after overcapacity is reached.
As long as home prices are going up, leverage is a plus, not a negative.
As long as office rents are going up, leverage is a plus, not a negative.
But once you reach surplus capacity with too many office buildings, too many houses, too many cars, too many cargo ships...prices start to fall (deflation).
After that excess capacity inflection point is reached, then the game is reversed. Suddenly leverage that was a positive is now a giant liability.
What this means is that overleverage isn't the core problem. Overleverage does the most damage, the fastest, but only under the circumstance of the deflation inflection point being reached first.
And deflation is merely the Markets reacting to surplus capacity.
Too many automobile manufacturers making too many cars.
Too many shipbuilders making too many cargo ships.
Too many contractors and real-estate investors building too many shopping malls and too many office buildings.
It is only when you reach the point of first having "too much" of something that deleveraging debt comes into play.
Prior to that point the debt is fine...even beneficial. But alas, all good things must come to an end.
Welcome to deflation...what you get after saturating the surplus capacity inflection point even if your government is pouring $12.8 Trillion in freshly printed money into the economy during the previous 12 months...a remarkable time for prices to decline.
Overleverage causes malinvestment which causes surplus capacity. The malinvestment also strangles other industry which slows economic growth. The economic problems start with the overleverage and start to get fixed at the excess capacity inflection point (provided the market is not interfered with to produce even more excess capacity).