Forex Blog: Currency Trading News & Analysis.

April 4th 2005

Bubbles in global markets may necessitate interest rate increases

Dangerous bubbles may be forming in global asset markets. In nominal terms, oil and real estate prices have reached record highs. Corporations are spending record sums of money on acquisitions. Venture Capital firms are practically giving away money to anybody with an idea. Warren Buffet, considered many to be the the US’ savviest investor, is sitting on a pile of cash, $43 Billion high. Might he be on to something? Excess global liquidity is forcing investors to pour money into increasingly obscure sectors of the economy in search of returns. Houses and commodities are being purchased in bulk as investments, rather than for their utility. Corporate junk bond spreads have fallen. Spreads on emerging market debt has also fallen, and may not accurately reflect the inherent risks involved in lending to developing countries. A collapse in global asset markets could echo around the world, and destabilize entire economies or lead to massive debt defaults. Should central banks quickly raise rates to preempt such a collapse? The Fort Wayne Journal-Gazette reports:

I don’t know whether the Fed was right or wrong last month in not raising interest rates more than a quarter of a point and in sticking to its promise of “measured” increases in the future. What I do know, however, is that it is silly for the Fed to continue to ignore the condition of asset and currency markets when making such decisions and explaining them to the public.

Read More: Global Economy in Cash Bubble

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Posted by Adam Kritzer | in Investing & Trading | No Comments »

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