Wednesday, May 23, 2007
The Organization for Economic Co-operation and Development has released a report asserting that the current private equity buy-out boom is the result of excess liquidity and low yields caused by distortions in the global financial system - mainly in China and Japan. The OECD stated in its report that:
Low yields result from excess global saving and liquidity. They risk pushing leverage and equity prices in parts of the corporate sector to excessive levels . . . . [adding that] Two major prices in the world economy worth noting in this respect are the near zero interest rates in Japan and the fixed exchange rate for the reminbi.
The OECD proceeded to recommend that:
The policy focus from a global perspective should be on raising interest and exchange rates that are too low at present. But domestic considerations in the countries concerned may delay this process . . . .
With the Federal Reserve likely to lower interest rates and the U.S. heading into a period of lower economic growth it remains to be seen whether China and Japan will have the political and economic strength to also lower their interest rates and, in the case of China, further permit the Reminbi to float. Food for thought as Secretary of Treasury Paulson and Chinese Vice Premier Wu Yi meet for talks this week on these and related issues.