Lisa Simpson
Dec 23,2009
In: Foreclosure

There are Talks About Recovery but Rumours About Another Bubble

There are talks about recovery but also rumours about another bubble are making the rounds. Recovery seems to be riding a speculative bubble.

Huge profits are being made by important financial entities and capital is flowing into the emerging markets leading to speculative increases in the stock markets across the globe. In Asia a property boom is being noticed.
On the other hand the victims of this reverse gear boom are complaining that the source of this is in the USA where easy money is beginning to flow. Fantastically low interest rates are infusing huge liquidity into the markets. The idea is to save the financial infrastructure and the real economy from collapsing by taking resort to a monetary stimulus to kick off recovery. The same kind of measures was being and is followed in various other nations, although not with the same amount of intensity as in USA. But the lead has been given by America – the home to the maximum number of poisonous assets and collapsed banks.

Initially the introduction of this policy gave out hints that the economy was on the path to recovery. But there are also indications of the same symptoms that created high profits and led to the big financial crisis of 2008. The dangers connected with that bubble were not given due importance because of the quick recovery and benefits reaped from this policy.

Thus there are two schools of opinion – some are satisfied with the recovery even if in fits and starts while others are apprehensive of another downturn known as double-dip-recession.

Immediately prior to the visit of Obama to China, the banking regulator of the latter country, Liu Mingkang was critical of the Federal Reserve feeding fuel to speculation all over the world by taking recourse to a loose monetary policy to save its own financial companies. The same sentiments were soon echoed by Wolfgang Schauble who came down harshly on the carry-trade done with the cheap dollar. Dollars were borrowed at low rates for investing in assets that promised higher yields outside. The investors in USA were taking recourse to this type of trading to gain from the gap between the low interest and the high yield on investments but also from the depreciation of the dollar in the short-term. For instance less number of euros was needed to buy dollars to repay original loans taken.

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