Jesse Colombo writes for Forbes that you can forget about the LIBOR interest rate fixing scandal of a couple of years ago; the real LIBOR scandal is how the conspiring banks have kept interest rates so low for so long that a massive bubble has been inflated. A crash and crisis is inevitable…
Amid all of the attention that the Libor rate-fixing scandal has received, the world is completely overlooking a far worse Libor “scandal” that has been occurring right under our noses this entire time. Though the Libor rate-fixing scandal is certainly no trivial matter, the losses caused by it amount to a few tens of billions of dollars, which is ultimately a drop in the bucket compared to the size of the global economy and financial system. In addition, as dramatic as the term “rate-fixing” sounds, the Libor manipulations only moved the Libor rate by a few basis points (basis points are .01 percentage points) for just a few brief moments at a time. The Libor manipulations did not move the rate by significant magnitudes such as from 5 percent to 2 percent, for example.
The vastly worse Libor “scandal” that I am referring to is the fact that the Libor has stayed at record low levels for the past half-decade, which is helping to fuel a massive economic bubble around the entire world that will end in a devastating financial crisis that will be even worse than the Global Financial Crisis. Instead of causing a few tens of billions of dollars worth of losses like the Libor rate-fixing scandal, the “Libor Bubble” will gut the global economy by trillions of dollars.
The chart below shows the U.S. dollar Libor rates for four common maturities:
Chart source: Mortgage-X.com
The Euro, Japanese yen, British pound, and Swiss franc Libor rates for all maturities have also been at record lows for a record length of time (click on links to see charts). Low interest rate environments create economic bubbles that burst when interest rates eventually normalize. The reason why low interest rate environments inevitably lead to the inflation of bubbles is because low borrowing costs encourage credit booms and discourage saving by reducing the rate of return on savings accounts and fixed income investments.
Prior Libor rate troughs have resulted in bubbles that ended in crises when the rate rose again…
[continues at Forbes]