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“But how is that? If the dollar carry trade money is coming into China, logically, the demand for yuan should go up against the dollar, as investors look to convert their dollars into yuan. And that in turn should increase the value of the yuan against the dollar. Shouldn’t it?” she asked.

“Theoretically you are correct. But what happens is, the People’s Bank of China, the Chinese central bank, has cranked up its printing presses. The Chinese money supply has increased by around 29.4% in the last one year. This ensures that even with all the dollars coming in, the demand for yuan stays stable and hence the fixed value protecting Chinese exporters. But the fall out of this is that a lot of this newly printed money is leaking into the stock and real estate market in China, taking them to even greater levels.

Another great example is Hong Kong, which has printed and injected HK$546 billion into the foreign exchange market in the last 12 months. This again is largely to offset the huge demand for Hong Kong dollars by the carry trade investors. This has ensured that the value of the Hong Kong dollar is fixed against the US currency, with one US dollar continuing to be worth HK$7.8. And I need not tell you that a lot of this newly-printed money has landed up in the stock market for speculation,” I said.

“So what you are saying is that first the money coming in through the dollar carry trade route is pumping up the stock, real estate and commodity markets all over the world. Two, the money being printed by various central banks all over the world to ensure that the value of their currency doesn’t shoot up too much against the dollar is also at some level getting diverted for speculation purposes. This in turn is pushing these markets higher and higher.”

“Yes, dear. That’s what I am saying.”
“And what about relationships being like a bubble?”
“Oh, that I thought was self-explanatory. For any investor to continuously make money, he needs to successfully keep identifying which is the next big bubble and get out with the money before the bubble bursts.”

“So are you saying that in a relationship, there comes a point when we know each other so well that the relationship is about to split and so it makes sense to split?” she asked.
“No. What I meant was that for a relationship to keep growing, we should be able to search for the next big bubble. You know, some aspect that we don’t know about each other... something that we might like doing together until it is time for the next bubble.”

(The example is hypothetical)
The article borrows heavily from Central Bankers Blowing Bubbles in Global Markets, Gary Dorsch, www.safehaven.com