May 10, 2008

Sub prime crisis can fuel commodity bubble – UNDP

Mr Kemal Dervis administrator of the United Nations Development Program last week said that the liquidity boost and various macro economic measures being adopted to fight the sub prime crisis, which has sent stock and bond markets on tenterhooks across the world, can soon fuel a commodity bubble.

Mr Dervis said that "I will not be surprised that 2 to 3 years from now, we realize that the liquidity and macro boost generated to fight the sub prime housing crisis ended up fuelling a commodity bubble. We may again be faced with fighting the negative consequences of an unforeseen downward adjustment, this time in commodity prices."

He was also critical of strong expansionist US macro policy response to crisis situations saying such policies carry dangers of inflation. He said that strong US macro policy responses have led to one asset bubble being replaced by another.

He said that "It may well be the commodities, which are now rising in price at an unreasonable and unsustainable rate." He added that this is fuelled again by underlying huge investment resources and accompanying liquidity available in Asia because of high savings rate, in the Middle East because of the oil bonanza and in the advanced economies because of significant rise in the share of profits and high incomes in GDP.