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| World markets are afloat on a sea of liquidity. The Indian stock market has been a late entrant to the party, although it has made up for that by the speed of its ascent.
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| Central banks throughout the world have loosened their purse strings, and the result has been a flood of money desperately searching for returns.
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| Emerging markets are the flavour of the year, with Asia (ex-Japan) funds seeing inflows of $2.2 billion in 15 straight weeks. Thailand, the best performing Asian market is up 74 per cent year-to-date, and our Sensex hasn't been doing too badly either.
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| Inflows into Asia, both as a result of payment for exports and from financial flows, have resulted in Asian forex reserves burgeoning to $1.6 trillion, with China accounting for $356 billion. What causes these massive financial flows? Where does the money come from?
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| Richard Duncan, author of The Dollar Crisis, a book making waves on the international pop economics circuit, says that the problem started thirty years ago, when Nixon abandoned the gold backing for the dollar and allowed the currency to float freely.
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| Without the necessity to convert dollars into gold, the stage was set for unlimited dollar expansion.
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| Duncan's thesis is that the US is in the happy position of running up huge current account deficits by paying dollar IOUs to foreigners. When these dollars enter the exporting country, they lead to a massive rise in the money supply, and this, according to Duncan, leads to all sorts of credit bubbles.
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| What's more, the build-up of dollar reserves by the exporters is then reinvested in the US, building asset bubbles there.
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| That's Duncan's thesis. But there are other, similar theories, all of them pointing to the series of interconnected bubbles that keep popping up one after the other.
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| Take, for example, the massive inflow of dollars into the Opec economies in the seventies, a consequence of the rise in the price of oil. These petrodollars, as they were called, were parked with US banks who used the money to lend to Latin America and Eastern Europe.
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| That bout of indiscriminate lending, the consequence of too much liquidity, was a classic example of a credit bubble. It didn't last long, though, because rising interest rates in the US brought an abrupt end to the party.
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The upshot - severe economic contraction in Latin America, with the eighties being known as the
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