by George Dorgan
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Between 1990 and 1996 the breakdown of communism happened. It leads to a fiscal spending boom in (Eastern) Germany and – due to high interest rates and inflation – to a breakdown of the European monetary system.
The recession of 1991 led to the Japanese balance sheet recession, a but phase with deleveraging from private debt that took at least 18 years until 2007. The strong German fiscal expansion led to high inflation and a severe test of the European monetary system (EMS) and Exchange Rate Mechanism (ERM) in 1992. Investors were attracted by high German interest rates – for them high safety and high return at the same time.
On Black Wednesday in September 1992, the Bank of England lost the battle against hedge funds led by George Soros. Italy and the UK left the ERM. The prevailing high interest rates caused banking and real estate crises in Sweden, Finland, the UK and Switzerland.
