Blowing bubbles is fun, but will they pop?

The US economy grew by a strong 3.9% in the second quarter, having grown by just 0.6% in the first. US financial year starts on 1 January, as opposed to 1 April in India. Surprisingly, the Federal Reserve kept interest rate on hold this month. Apparently, this was because of turbulence in markets and weakness in the global economy. Share markets around the world are so high because there is too much liquidity, due to loose monetary policy by central banks, so we would expect prices to fall as rates start to go up. If that is the fear then central banks will be permanently paralysed. Perhaps the Fed had advance knowledge that only 142,000 jobs were added in September, while 203,000 were expected, and the August number was revised sharply down to 136,000. The unemployment rate was steady at 5.1% because 350,000 had dropped out of the market. With so many jobless people competition for jobs is keeping wages low so there is no inflation. The US is finding it difficult to add 100,000 jobs every month to keep up with population growth so how will India produce jobs for 68,992 every single day, which is 2.1 million every month, when 2.3 million applied for 368 posts of peons in UP? Experts have been predicting that the Fed would find it difficult to start raising rates. The crisis in 2007 was caused because of excessive debt incurred by households and banks, due to very low interest rates for a long time. Central banks have responded to the crisis by using the same tools that caused the crisis in the first place. That is, easing monetary policy still further by lowering interest rates to near zero percent and buying bonds, releasing trillions of dollars into the economy to bring down their currencies. The Fed has spent over $4 trillion on 3 rounds of quantitative easing in the hope that low borrowing costs will increase spending and spur more investment, which will bring down unemployment. The fear was that so much liquidity will cause inflation as companies and people spent more on borrowed money. That has not happened because of low commodity prices, as growth in China has slowed down, and because a lot on money has gone into buying assets, such as shares, to increase profits. The Fed has been alarmed by China's slowdown, which forced the issue by devaluing its currency in August. The result of all this loose monetary policy has been to inflate asset price bubbles. Bursting of the dot.com bubble did not cause such a painful crisis because it affected only some investors but collapse of asset price bubbles, caused by excessive debt, is much more severe and takes longer to recover from. For the first time emerging markets will see a net outflow of foreign money in 2015. What happens to India? We are sitting on a huge bubble in real estate prices. The RBI reduced the repo rate by 50 basis points in response to anguished cries to protect this bubble. What happens when the bubble pops? As it must.