Germany Warns U.S. About Market Bubbles

The Trumpet (Link) (November 24, 2009)

Germany�s finance minister says the United States is contributing to another possible round of global instability by setting low interest rates. Speaking at a banking conference in Frankfurt last Friday, Wolfgang Sch�uble echoed concerns of China�s banking regulator Liu Mingkang, who a week previously warned that low U.S. interest rates were fueling another round of asset price bubbles.

Around the world, and especially in Europe, there is growing concern that the low U.S. interest rate is fueling a �carry trade.� This is when investors borrow money in a country with a low interest rate and invest it in a country where they can get a relatively high return on their investment. After a short period of time, in theory, they can sell their investments, pay back their debts in the original country, and have some extra money left over. In practice, although the carry trade can be lucrative, it is also a risky business. (A detailed explanation of the carry trade can be found here.)

Some economists are worried that investors are taking advantage of the weak dollar and the U.S. government�s easy-money monetary policy to finance carry trades. If this is the case, then the global economy could be in for another shock.

According to Nouriel Roubini, an economist who gained notoriety for correctly identifying and predicting the current global economic crisis, America could be facing �the mother of all carry trades and mother of all highly leveraged global asset bubbles.�

�One day this bubble will burst,� he warns, �leading to the biggest coordinated asset bust ever.�

But even if the carry-trade bubble does not face imminent implosion, there is perhaps a bigger story in the warnings out of Europe and China.

By accusing America of irresponsibly fueling a carry trade, Sch�uble is really saying that the U.S., if left unchecked, will cause yet another financial crisis. Sch�uble is actively and systematically building the case for stronger global financial regulation out of Europe�a trend that is already well underway. [emphasis mine]

Already the European-controlled Financial Stability Board is poised to become the world�s most powerful financial regulator. Watch for Europe to become the center of economic activity as America is sidelined by accusations of incompetence and blamed for the world�s financial woes. For more information, see our article �Financial Regulation in Prophecy!