'Rolling bubble' threatens world economy

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'Rolling bubble' threatens world economy: economist
abc.net
Reporter: Stephen Long
MARK COLVIN: For years there were warnings about a housing bubble in the United States and parts of Australia. Now it's burst in the US, with devastating consequences.

Some argue that private equity buyouts are giving rise to a similar bubble.

But a senior OECD official argues these are all part of one giant bubble, which threatens the world economy.

Former Reserve Bank economist Adrian Blundell-Wignall is Deputy Director of Financial and Enterprise Affairs at the OECD.

He says there's a "rolling bubble" of excess money sloshing around the globe, shifting from market to market.

It's being inflated by a series of distortions in the world economy.

And unless they are dealt with, he predicts the bubble will eventually burst with serious consequences.

On a visit to Sydney, Adrian Blundell-Wignall spoke exclusively to our Economics Correspondent Stephen Long, who prepared this report.

STEPHEN LONG: Adrian Blundell-Wignall is part of a diaspora of economists from the Reserve Bank of Australia now working overseas.

At the OECD in Paris in recent months, he's written a number of influential papers: one on the causes of the private equity boom, another prescient piece on hedge funds and their exposure to risky debt. At heart, he sees a common cause - too much money chasing too few assets.

ADRIAN BLUNDELL-WIGNALL: I think the big issue is there's just so much liquidity sloshing around the world economy, coming from a whole variety of sources. I mean, words like sovereign funds come to mind, you know, our own Future Fund is like a sovereign fund, but when you compare that to Sovereign Funds like the Chinese Foreign Exchange Reserves, other foreign exchange reserves, the reserves of the oil producing countries who are benefiting from the huge increase in the price of oil.

All of this money together with very low interest rates in some parts of the world, zero interest rates in some countries, has meant that there's just a huge amount of liquidity sloshing around and trying to find a home.

STEPHEN LONG: Adrian Blundell-Wignall says that excess liquidity is moving from market to market fuelled by cheap credit, driving up asset prices. He calls it a rolling bubble.

ADRIAN BLUNDELL-WIGNALL: So when you have that sort of a situation, you get these rolling bubbles.

One of the first beneficiaries of the low global cost of capital was the mortgage kind of boom and the housing boom in the US and other places. Of course, we're beginning to see the, the unwinding of that at the moment.

We've seen it going into private equity where we've had a huge boom in private equity. And as the yields have started to rise of recent times, some of those deals are beginning to be pulled. And I suspect that we may see a bit of a popping of that bubble as well.

But that liquidity is still there - the mechanisms giving rise to that liquidity are still in place - and so what that means is that you get these rolling bubbles.

Where does the money go next, is the issue.

STEPHEN LONG: He says the rolling bubbles are being inflated by a series of distortions in world markets, which have created a surplus of cheap credit.

ADRIAN BLUNDELL-WIGNALL: The key thing in globalised financial markets you really have to understand is there's no such thing as a domestic monetary policy that doesn't matter for the rest of the world. Because if you're making interest rates very low in Japan, or making liquidity strongly available in places like China, then in globalised financial markets the mechanisms are there, through derivatives and swaps and so on and so forth, to basically take advantage of those low interest rates and low costs of borrowing around the world.

This is where this big liquidity bubble is actually coming from.

STEPHEN LONG: Among the distortions he identifies are negative real interest rates in Japan and China's currency, which the Government has kept at an artificially low rate. Manipulating the currency has allowed China to sell goods cheaply overseas and accumulate huge foreign currency reserves, which in term have flowed back into the world's bond markets, driving down the cost of borrowing for business.

But this OECD economist says it's unsustainable.

ADRIAN BLUNDELL-WIGNALL: The Chinese currency is a really good example. I mean, those reserves now are over $1.3-$1.4 trillion. Every time people try to invest in China - direct investment or whatever - that puts upwards pressure on the Chinese currency, and because the Chinese authorities intervene in the foreign exchange market, what that means is it's like printing money.

STEPHEN LONG: But the rolling bubble won't stop rolling yet.

ADRIAN BLUNDELL-WIGNALL: I think you have to say that as paradoxical as this sounds, that it hasn't been, it hasn't been good enough to be really bad yet. You can see that in things like, say, the mega cap stocks around the world, in America for example, the top 10 stocks in the US market - they've done virtually nothing in the last… in the last five years.

But so far that liquidity hasn't made a really big impact on the very large cap stocks, and of course until it does, you know that it's probably not over.

While liquidity's very strong, and before you see any sign of inflation picking up in the world economy - which always spells the death knell for markets, and you still haven't really seen any sign of that yet - that it probably goes on for some time.

STEPHEN LONG: How long, no one knows.

But unless the distortions inflating the rolling bubble are dealt with, Adrian Blundell-Wignall fears it will end badly, and the bigger the bubble, the louder the bang.

MARK COLVIN: Stephen Long.

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Op maandag 6 augustus 2007 12:27 schreef calvobbes het volgende:

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Is het een feit dan?
het is meer een onderzoek cq beschouwing van een paar mensen. Dat wil nog niet zeggen dat hun bevindingen waarheid zijn en al helemaal niet dat er sprake is van een samenzwering waarvan mensen profiteren.