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Is easy money at Western central banks blowing bubbles everywhere? Donald Tsang, head of Hong Kong's government, is one of the many who think so, while fears about a flood of foreign investment have brought capital controls back into fashion. But the reality looks more complex.
Yes, markets have soared since March. But back then, panicked investors were pricing in Armageddon. Even now, most assets are only back around pre-Lehman levels. Valuations are no longer cheap, but they're not in bubble territory.
Meanwhile, there's little evidence that speculators are borrowing cheap money in huge quantities. As Paul Kasriel of Northern Trust points out [pdf], US bank credit is only growing if you include banks' holdings of government bonds. Excluding that, lending is shrinking.
What's going on here? Unwilling to lend, banks are instead stowing their capital in safe government bonds. Other investors are happy to sell their bonds to the banks, since they're now confident enough to switch into something a bit less conservative. But there's no net credit growth involved.
Yes, central banks have helped to boost this appetite for risk by cutting interest rates and using quantitative easing to bring down yields on government bonds, making safe assets less attractive. But that's not the same thing as encouraging credit-fuelled buying of risky assets, which is what most critics claim is going on; it's nothing like as dangerous.
What's more, we can't blame the Fed for all the extra liquidity around the world. Much of the situation is made in Asia. As this piece spells out, it's money from China that's flooding Hong Kong. Meanwhile, Japan's attempts to boost its economy have been juicing neighbouring markets since the nineties.
And Asian countries that hold down currencies to boost exports must take responsibility too. Cheap currencies twinned with economies that are set to outperform is an invitation for capital to flood in. You don't need a credit bubble for that, just rational investors chasing growth.
So I don't see bubble behaviour yet. At worst, investors are just overly exuberant. But with Western central banks likely to keep policy easy for a long time, Asian countries will have to let their currencies rise if they want to prevent a bubble developing in the years to come. This, of course, will be a major bonus for foreigners who hold Asian assets.
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Cris Sholto Heaton
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