The financial express points of today - Jan 13 2010.

Article - Bubble warning Page 20 from selections from economist (all the things mentioned in this blog post are my understanding of what was published )

• The effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009.This is largerly thanks to interest rates of 1% of less in America, Japan, Britain and Eurozone which have persuaded investors to take their money out of cash and to buy risky assets.
• The American market is around 25% below the level it reached in 2007. But it is still nearly 50% overvalued on the best long term measure, which adjusts profits to allow for economic cycle.
• In 2008 falling markets caused a vicious circle of debt defaults and fire sales by investors, pushing asset prices down even further. The market rebound was necessary to stabilise the economies last year, but now there is a danger that bubbles are being created.
• Longer the world keeps its interest rates close to zero, the greater the danger that bubbles will appear most likely in emerging markets, where growth keeps investors optimistic and currency pegs import loose monetary policy, and in commodities.
• Central banks have range of tools to discourage growth of bubbles- The most powerful tool ofcourse is the interest rate.
• But central banks are wary of using it to pop bubbles because it risks crushing growth as well. And with the world economy in its current fragile state, they are rightly unwilling to jack up interest rates right now.
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