Liquidity Bubble – The Next Big Bubble

Fed’s $600 Billion Quantitative Easing Plan is finally out, and the reason why the fed announced the quantitative easing is to combat low growth and unemployment which has been on since the recession hit the USA economy in 2008. As of now it may boost the economy and also create job opportunities but the real question is will it lead to another bubble and a more dangerous one too, called liquidity bubble.

The immediate impact of quantitative easing would be rise in prices of risky assets like commodities whether it’s crude, gold, silver or other metals all will rise, which will lead to higher inflation which many economists are warning about. This liquidity will also lead to flaring up of assets prices like equity, real estate in emerging economies like India, Brazil, Russia and other such economies.

Now comes the scarier part which is that this liquidity which has been there floating around since 2008 can result in a bubble of its own where assets prices will go to such levels that do not justify the valuations and which ultimately result in a situation where this bubble will burst . We all know what happened with the housing bubble in USA, but this time this liquidity bubble will not be limited to USA or any one economy it will affect all assets class across the economies. It is due to this reason many people are worried about the quantitative easing done by the Fed and smart ones are taking this opportunity to sell those assets like gold, silver and emerging market equities which are rising because of this quantitative easing.

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