The fact that it didn't could be another
sign of an asset bubble fueled by low interest rates and markets divorced from fundamentals.
Are they so afraid of popping any
sort of asset bubble that they have to be extra ginger in raising rates?
That difference of opinion may partly be explained by understanding what
type of asset bubble bitcoin could be.
Relatively easy liquidity has fuelled investment in China's notoriously frothy real estate sector - property investment jumped 22.8 percent in January and February combined from 2012 - pushing up home prices and triggering hawkish talk on property tightening from Beijing policymakers to contain the
risk of an asset bubble rapidly inflating.
Since World War II, there have been three main culprits: (1) an external «shock» to the economy, such as the early 1970's OPEC oil embargo or the first Gulf War; (2) the
bursting of an asset bubble (think 2000 dot - com stock bust or the bursting of the housing and credit bubbles in 2008); or (3) an overheating economy that results in higher prices, which in turn prompts the Fed to raise interest rates.
It might hurt a little now but will bring the U.S. economy in line with global demand and prevent the
creation of an asset bubble whose bursting could cause a lot more pain in the future.
By late August, the DJIA had gained 44 percent in a matter of seven months, stoking
concerns of an asset bubble.4 In mid-October, a storm cloud of news reports undermined investor confidence and led to additional volatility in markets.
We should make note that Greenspan followed his comment about irrational exuberance by quickly adding that central bankers need not be concerned with the
collapse of an asset bubble if it does not impair the real economy.
A
succession of asset bubbles has formed in China, caused by a torrent of speculative money sloshing from stocks to bonds to commodities.
According to Asgeir Jonsson, an economist at Reykjavik - based asset manager Gamma, «If the development continues without interference, this will lead to a property bubble within the next two years» and «There's a greater
risk of an asset bubble being created in an economy that is closed off behind capital controls.»
He says Bitcoin «ticks all of the boxes that we consider to be essential
criteria of any asset bubble,» including a fivefold surge in trading volumes over the last five years, lack of financial regulation and the launch of related financial instruments such as bitcoin futures.
Even the biggest Fed doves admit that low rates created a heightened risk
of asset bubbles and unstable asset inflation.
Tony Blair and Gordon Brown were regularly warned about the risks
of an asset bubble.