BEST OF DOUG NOLAND

October 25, 2005

A very strong case can be made that global "financial conditions" have never been as loose. Perhaps global policymakers are scratching their heads. How is it possible that the Fed raises rates 11 times and global liquidity abundance becomes only more pronounced? Well, the problem is that "Tightening Lite" is not tightening at all. Unrelenting U.S. excesses have been accommodated by the Fed, assuring that U.S.-style leveraging, speculation and asset-based Credit excess take hold across the globe. And instead of tighter U.S. monetary policy working to reduce massive Current Account Deficits and the resulting Asian Liquidity Bubble, continued accommodation has fostered a second massive Liquidity Bubble throughout the oil producing economies.

The Global Liquidity Glut will require true global tightening. The Japanese and Europeans join the Fed "behind the curve." And the longer global rates remain too low and liquidity overly abundant, the more problematic the unavoidable adjustment in global asset markets. The U.S. Mortgage Finance Bubble is well entrenched. The Global Energy Boom is now well entrenched. The Emerging Market Bubble is also now well entrenched. And the problem with well-entrenched Credit and Speculative Bubbles is that a period of excess engenders self-reinforcing "virtuous" cycles. Over time, fundamentals look increasingly alluring – and excess begets only greater excess. Latin America, for example, has enjoyed a bonanza of financial flows, which have stoked local currencies and market values. With liquidity flowing, asset prices rising and moderate inflation (for now) contained by strong local currencies, positive fundamentals are absolutely irresistible.