by Reb Akiva at Mystical Paths
In 2006, most of the Western world was leverages to the hilt. It was boom times and things were looking good. Property prices had been rising steadily for a decade or more, everyone that could - and almost half could - had been upgrading their homes, cars, and possessions. Good times.
While leverage, meaning loan levels, were high, and the steady rise of real estate prices couldn't go on forever, there wasn't some magical line that was crossed where it all just went bad. Rather, one specific event changed the balance and started it all unraveling. What was it?
Interest rates had been low from 1992 until the year 2000. With the .Com stock market bubble burst, rates were raised briefly, and dropped again in 2001 until late 2005. A way of life started in 1992 and continued (except for the brief 2000 exception) until the end of 2005. For 13 years money was cheap. Companies got used to not needing to keep cash on hand, instead a credit line served that purpose with only a small expense. A few years later, the same way of living moved to most peoples pockets.
Interest rates don't move on their own, it's controlled by central banks, in this case the US Federal Reserve (the Fed). Why did the Fed raise rates in 2005?
For the main reason they always do, to fight inflation. The Fed felt that prices were getting out of control. Transportation costs were inching higher, food prices were starting to jump. Energy prices were jumping in a major way. In other words...
From 1986 until 2003, oil prices hovered around $25 per barrel on average. In the year 2000, OPEC (the Oil nations working together) started CUTTING oil production. From the time of that cut, oil prices started rising WITHOUT STOPPING until a month ago. It was gradual at first, but with China, India and other parts of the 3rd world growing up and out from the increased world economy, demand went up AND SUPPLY WENT DOWN. Intentionally, to raise the price. Arab oil greed.
It worked. The price jumped from $25 to $30 a barrel in 2000. Oh, it dropped back to $27 after 9/11 (2001). But the climb started again in 2002. By 2003 it was back to $30 a barrel. We started to hear news reports about "world oil peak", "world supplies and capacity at it's limit". In 2004, price was now $40 a barrel, and in 2005 up to $50. The Arab oil producers were rolling in the money, they were now receiving double what they were getting just 5 years ago. They were also so much more important now - both as the caretakers of huge piles of cash and as the precious energy of the world was threatened by war and regional instability, and was about to run out!!!!! (in another 50 years, but that's besides the point)
Our dolls come from China, our cars from Korea or Japan or Canada. Our winter fruits from Chile, our apples from Washington (state). Our oil from Saudi Arabia, the refined gas from Texas. The TV from Tawain, the jeans from Indonesia.
As energy costs doubled, the global economy started to work against us. Prices of every type of transported good - which is almost everything - rose.
The US Federal Reserve acts against rising prices - aka INFLATION - by raising interest rates to curb demand. Supply and demand, lower demand lower sales, lower sales lower prices.
Except this time the prices had nothing to do with supply and demand. The supply of oil was being artificially curtailed by OPEC - the Arab producers - to artificially inflate the price. A campaign of disinformation reporting growing shortage conditions was attached to it, to make the curtailed demand much more effective - driving speculation and resource hording. It worked beyond their wildest dreams, in 2005 prices rose to just below $60 a barrel.
Prices of every good that used oil (plastics) as a base component skyrocketed. Energy intensive products jumped. Products transported long distances (practically everything) had their transportation costs triple, raising prices at least 30%.
The Fed saw serious inflation forming and acted to stop it. They rose interest rates again and again, but it didn't work. They figured they must be raising them too slow, so they raised them faster...
...and suddenly, with a combination of higher energy costs, higher food costs, higher transportation costs, suddenly in the short space of a year people saw their housing cost DOUBLE. Those in weaker financial positions couldn't handle the new combined load of increasing living costs and increasing housing costs when their adjustable rate mortgages reset to the new higher rate and their payment doubled.
And all of that leverage began to collapse.
Oil prices peaked at ~$135 per barrel in March, 2008. Then, as the financial collapse EXPLODED, demand fell through the floor and even the best of OPEC production cuts (they tried several more since then) didn't help. Oil is down to $43 a barrel today, and still falling. (That's down to the 2004 price.)
And that is how the greed of the sheiks and the dictators and the mullahs to finance their opulence and armies and revolutions (never to actually grow their economies, educate their populace and develop future potential) collapsed the Western economic world. Oh, to be fair the US Federal Reserve made some very stupid moves, completely misunderstanding the situation. And the West had leveraged itself to a very risky level. But it was the greed of the sheiks who knocked it all down.
BS"D - בסיעתא דשמיא