Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says

Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says

Policy makers steering the global economy have pumped the financial system with so much liquidity that any exit risks popping potential asset bubbles or stunting a recovery, Danish central bank Governor Lars Rohde said.

“The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation,” Rohde, 59, said in an April 5 interview from his office in Copenhagen. Though there are no current signs of consumer price inflation “there is inflation, perhaps a bubble, in some asset classes,” he said. “Equities (MXWO) are trading close to all-time highs. Segments of property markets across the globe, for example London, also display symptoms of this. How do we exit this without killing whatever nascent recovery there might be at that time?”

The warning from the head of Denmark’s central bank, which has kept its deposit rate below zero since July, comes as policy makers in Japan, the euro area and the U.S. deliver unprecedented monetary stimulus to drag the global economy out of the worst crisis since the Great Depression. Easy money has fueled equity prices, helping send the Standard & Poor’s 500 Index to an all-time high on April 2. The yield on Japan’s benchmark 10-year bond hit its lowest on record last week.

“We’re in a landscape where we’ve never been before, with regard to extreme monetary accommodation over a very, very long period of time,” said Rohde, who took over as the head of Denmark’s central bank in February. “What does that end up doing to a society? It’s been a necessary policy, but I have my concerns about what the long-term risks are.”Crisis Policies

The prospect of a reversal of crisis policies looks remote as the euro area bails out a fifth nation and Japan’s central bank embarks on a new phase of monetary easing, doubling its monetary base as it targets faster price growth. The developed world’s record-low interest rates are giving a false sense of affordability to projects and businesses that would probably fail in a more normal monetary climate, Rohde said.

“The risk is that we’ll have companies that are only able to survive because interest rates are extremely low. But these are companies that ought to have gone down,” he said. “We’re seeing projects going through that wouldn’t be sustainable at higher interest rates. We’re seeing zombie companies and zombie economies because of the extremely low interest rates.”

So far the crisis policies deployed by central banks since 2008 have had limited success in generating any lasting recovery. The 17-nation euro area will contract 0.3 percent this year after shrinking 0.6 percent in 2012, the European Commission estimates. Both the U.S. and Japan will expand less than 2 percent this year, the commission said Feb. 22.

Krone Peg

The U.S. Federal Reserve has held its benchmark rate close to zero since 2008, while Japan’s main rate is between zero and 0.1 percent. The Frankfurt-based European Central Bank has held its policy rate at 0.75 percent since July in an effort to ease the region’s debt crisis. All three have supplemented policy rate setting with some form of bond-purchase program.

“If we exit this regime too fast, too abruptly, then there are several corners of asset markets that could start showing signs of a bubble in the process of bursting,” Rohde said.

In Denmark, where monetary policy defends the krone’s peg to the euro, the central bank raised rates in January. That followed signs Europe might be able to stem its debt crisis, prompting investors temporarily to turn their backs on haven markets. The Danish central bank’s deposit rate is minus 0.1 percent and the benchmark lending rate is 0.3 percent.

Denmark, which boasts a debt load that’s half the euro zone’s average, probably won’t raise rates again for at least another three months, according to economists at Danske Bank A/S, Jyske Bank A/S, Nordea Bank AB and Svenska Handelsbanken AB.

Currency Wars?

“The krone is stable against the euro,” Rohde said. “It’s hard to claim that the krone’s exchange rate is undervalued.”

Rohde also argues that the “euro is actually in balance against the dollar.” There’s “nothing that indicates the euro isn’t within a likely level of where it ought to be. The exchange rate has fluctuated a bit but the euro’s not fundamentally over- or undervalued,” he said.

Excessive monetary easing isn’t evidence of central bankers trying to manipulate their currencies, Rohde said. Policies being deployed target domestic challenges, he said.

“It does create some unfortunate side-effects, but to talk of a resurgence of competitive devaluations, I don’t see any evidence of this,” he said. “My clear impression is that all talk of currency wars is exaggerated.”

To contact the reporters on this story: Peter Levring in Copenhagen at; Frances Schwartzkopff in Copenhagen at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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