Gary Stevenson

But a narrative started to form about why they pushed asset prices up, which was quite simple, which was that these crises caused interest rates to be pushed down.

So some context on interest rates.

Interest rates, which is the amount that you pay to borrow money, the amount you get for lending money.

Before 2008, before the Lehman crisis, they were at levels generally in the West, which are similar to where they are now, sort of 4%, 5%, maybe a little bit higher than they are now.

And when 2008 happened, the main sort of systemic response, the main response by governments and central banks, the institutions who are supposed to manage your economy, was to aggressively slash interest rates to effectively zero.

This happened in 2008.

It also happened during COVID.

So you see this massive reduction in interest rates to zero and this was generally came to be accepted that the reason that asset prices did well in the long run after the 2008 Lehman crisis despite the economy being weak was that interest rates were massively massively reduced.

Now, in economic theory, there's supposed to be quite a tight relationship between interest rates and asset prices.

And I'll explain why.

So when you look at an investment, the most simple investment you can make is to say put your money in a savings account.

Because you know you put it in there and the bank's going to say, we're going to give you 5% a year.

You put a million pound in the savings account at 5% a year, you are gonna get your 5% a year, which is 50,000 pounds a year.

Now, let's assume you're also looking at an alternative investment, which is you wanna buy a buy-to-let property.

And you found yourself like a nice big house, big luxury house that you can rent out for 50,000 pounds a year.

And you're thinking, OK, well, how much should I pay for it?

Well, you know that if you put one million pounds into a bank account, you're going to get fifty thousand pounds a year, which is the same return as this rental property.

So you would imagine since both of these investments yield a similar return of fifty thousand pounds a year, this house should also be worth maybe something close to one million pounds.

it's a simplified example but it makes sense right you know if interest rates are five percent then a house that gives 50 grand a year rent should be roughly equivalent to an bank account that gives 50 000 pound a year interest in rent okay so this house should be worth about one million pounds if rates are about five percent now let's assume rates are much lower one percent if

Now, if I put my 1 million pounds in a bank account, I'm only going to get 10,000 pounds a year.