Why bubbles burst

Ann Pettifor: 8th January, 2009, 23.45PM

With grateful acknowledgements to both the Financial Times and Thomson Datastream, am delighted to reproduce this very important graph of interest rates – UK, US and EU over the past decade.

They clearly show how high real official (i.e. base) rates were before the 2001 dot.com crash and the ‘debtonation’ of August 2007. Please note that this graph refers only to base rates. The important longer-term rates – for Mortgages and in particular corporate loans – were often higher. And if investments were risky – as many vital investments are – the rates were much, much higher.

What would be really excellent would be to have a representation of all rates – short and long, real, safe and risky, and including of course, LIBOR rates.

This graph reveals very clearly that the fall in interest rates in 2001 was a reaction to the Credit Crunch of 2000 – 2001. In other words, without those dramatic cuts in interest rates of the Greenspan era – the Credit Crunch would have unfolded in all its agony back in 2001. In the event, the dramatic reduction in rates eased the crisis then (just as Japan’s cut in rates had eased the 1987 bond market crisis) and helped to propel the global credit bubble’s girth ever outwards – until the rising rates of 2005-6 finally, like a dagger, burst the bubble in 2006. It was this bursting credit bubble that then caused the deflation of the many other asset bubbles that credit and creditors had inflated – the property, stock market, hedge fund, private equity, football clubs, race horses, veteran cars – to name but just a few.

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