Credit bubble

Let’s talk fair talk

The main concern right at the moment is not energy security, but the financial crisis.

The crisis did not start with Lehman Brothers and the American sub prime market in 2007. What we saw was only the tip of the iceberg of a credit bubble that started way earlier in the 80s. In 2000, the credit market debt was at the same level as in the 30s.

Reasons: People lived beyound their assets by borrowing money for consumption with the ever increasing prices on their houses as guarantee.

Key rates kept low to rescue the busting IT market. That meant that companies could borrow more money for expansions, as example with so called leverage-buy-outs. Add to that high leverage in hedge funds, credit default swaps and you get a mess (AIG, anyone?)

Even whole nations participated in the loan festivities.

So, what’s happening when everyone’s sobering up.

1. When credit level rises, every borrowed penny adds less and less positive output in the economy.

2. Loan goes to unproductive purposes such as real estate or speculation

3. Productivity per penny reaches zero

4. There’s no money left to pay off loans or interest as economies stagnates.

More loans cannot rescue the situation. It only stops the most acute leakage, but transfers the credit risks from banks and financial institutions to nations and central banks. Enourmous credits are needed just to remian status quo.

Most money in the financial system is created by debts with interest. But with shrinking economies, debts with interest cannot be paid.

So what will happen in the future?

I predict we will recover, but it’s gonns take time. And I don’t think we will ever see economic growth as we’ve seen these latest decades. But then also, we have the energy situation to solve…


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