In both cases, the crises followed a period of strong growth, rapid credit expansion and sharply rising asset prices. Prior to the Asian crisis, there was indiscriminate lending to the corporate sector. Investment activity was excessive, with the ratio of investment to GDP exceeding  1  L. Laevan and F. Valencia, "Systemic Banking Crises: A New Database", (Sept 2008) International Working Paper of the International Monetary Fund, WP/08/224. BIS Review 145/2008  1  35% for many economies in the region. The sub-prime crisis similarly originated from imprudent lending practices. The low interest rate environment also accentuated the build up of the excesses and rising asset values. In Asia , domestic credit increased to unsustainable levels, reaching 180% of GDP during this period. In the United States , it had increased close to 240% in 2007. The excessive leveraging and increased risk taking reinforced the formation of asset bubbles. In both cases, there was also abundant liquidity. Both Asia and the United States experienced surges of capital inflows. This was reinforced by favourable sovereign ratings in Asia and the strong ratings for the securitized instruments in the US . The eruption of the crisis set off the reversal of these trends. There was also a failure to recognise that in a highly integrated international financial system, it meant that a crisis that originate in one part of the financial system not only would have an impact on other parts of the system but it could have far reaching implications on other jurisdictions.
The aggregate demand is also affected by the elevated growth rates of raw materials and component inventories. Firstly, companies make up for the drop in inventories incurred during the pandemic and as a result of disrupted logistical chains. Secondly, in light of the last year’s experience companies are seeking to accumulate more inventories to insure against possible disruptions in supplies, as well as further price increases. These processes concern a broad range of production chains rather than a narrow group of goods. The structure of demand is also changing, as a result of changes in people’s way of life due to the pandemic. Neither the sustainability nor the duration of this process is clear so far. Yet, it evidently creates bottlenecks on the supply side. For instance, massive work and study from home spurred a sharp increase in the need for telecommunications followed by a considerable increase in the demand for microchips. Online orders require much more packaging materials. A pick up in demand for real estate is in part associated with the desire to reach comfortable conditions for working from home. Wishing to support their economies, many countries are expanding infrastructure projects; all this also influences the increase in demand for construction materials and metals. It is still difficult for businesses to assess which part of the elevated demand is temporary and which — sustainable. They need time to make decisions about investing in new production facilities.