U.S. zero benchmark interest could lead to global asset bubbles
"Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals," Nouriel Roubini, professor at New York University's Stern School of Business and chairman of RGE Roubini Global Economics, wrote in an article at the end of last year.
"So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the U.S. dollar, driven by the mother of all carry trades," Roubini explained.
The U.S. dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time, he added. Roubini, one of those few economists who accurately predicted the outbreak of the global financial crisis, has been called Dr. Doom for his consistently pessimistic yet accurate economic and financial observations. Roubini argued that the dollar carry trade, which he called mother of all carry trades, has created what he believed "mother of all highly leveraged global asset bubbles" and those bubbles would inevitably face bust when the borrowing costs of dollar funds start to rise.
