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Ben Bernanke gave world markets the nitro that was needed to boost its engines when he reassured that he will keep on pumping liquidity in the system. Markets across the globe welcomed the move with the US markets posting a record run.
There is one thing common between the US and Indian regulators, they create a panic and then take their own sweet time on damage control. Ben Bernanke speech in mid-June confused the markets with his ‘tapering’ timing (reducing the flow of liquidity in the system) resulting in an all-round sell-off in global markets. Nearly four weeks later the Federal Reserve chief goes on record saying ‘We’re not going to step on the brakes. We’re just going to let up on the accelerator’. He further clarified that there will be no rush to hike interest rates.
With clarity on continued liquidity support for some time, world equity and commodity markets picked up. What Bernanke did through his clarification in simply blew the market bubble bigger. There are few fundamental parameters that are supporting world market rallies.
Despite pumping in liquidity in the system since late 2008, US economy has barely picked up. On the other has US markets have given a return of nearly 150 per cent from their March 2009 low. The purpose of pumping in liquidity was to provide fuel to the economy. However, rather than banks lending money in creating and building assets, money seeped out world equity and commodity markets creating a huge gap between price and value.
Like an opium addict,markets have got addicted to liquidity. Even a mention of reducing it results in violent withdrawal symptoms.No central banker in the world now dares to take the pipe away.
However, the side effects are now hurting economies. After Bernanke clarified his statement, both oil and gold prices started moving higher. Both these are cited as the main reason for India’s high current account deficit. But Indian markets too have benefited from liquidity addiction. Bernanke’s mid June speech resulted in huge withdrawal from both Indian equity and debt markets resulting in an all round panic.
Though extremely harmful in the medium and long term, liquidity surge is presently the lesser of all evils surrounding Indian and world economy.Till refills are available, at least those in the markets have little reason to complain.
