We're not being taken to the (dry) cleaners, we're awashing in liquidity

Global Cash Glut Fuels Investment Boom, Rate Concern (Update1)
By John Fraher and Simon Kennedy

Markets around the world are awash in excess cash, fueling a frenzy of investment from London to Tokyo that may lead central banks to push interest rates higher than investors now anticipate.

Money remains cheaper than in the 1990s even after every major central bank raised rates this year, the first simultaneous tightening since 2000. The cash glut is reheating the U.K. housing market, while in Japan companies plan the most investment since 1990. China's biggest bank this month attracted orders for more than half a trillion dollars with its initial public offering of shares.

The ECB, unlike other major central banks, explicitly uses money supply to gauge inflation. Growth of M3, the bank's preferred measure for the 12 nations sharing the euro, unexpectedly accelerated to 8.5 percent in September, close to a three-year high. That added to pressure on the bank to add to its five rate increases since early December.

Other central banks including the Bank of England and the Bank of Japan are starting to share the ECB's view on money growth. That's a shift from a few years ago, when following money supply was deemed a relic of the 1970s. "There is something of a revival of monetarism," says Stephen Jen, London-based head of global currency research at Morgan Stanley.

One central bank that isn't joining is the Federal Reserve, which no longer sets a target for monetary growth and stopped publishing one measure of money supply in March.

"In the U.S., looking at monetary aggregates has gone out of fashion," says Jim O'Sullivan, senior economist at UBS Securities Llc in Stamford, Connecticut. "The Fed responds to the effects of asset prices, not to the prices themselves."

For central bankers, the threat is that overinvestment pumps up asset bubbles that lead to economic busts, just as the explosion of investment in U.S. technology companies did at the turn of the decade.

Available money is encouraging "barely profitable and highly risky" investments, French Finance Minister Thierry Breton said last month. The average interest rate of 10 leading economies adjusted for inflation is now around 2.8 percent, below the 3.2 percent average of the 1990s, Morgan Stanley estimates.

The Bank of England, which once shared the Fed's skeptical view of money supply as a policy guide, is now grappling with the fastest expansion of money in 16 years. After raising rates a quarter point in August, citing "rapid growth" of cash and credit, Bank of England officials are signaling a further quarter point increase when they convene next week.