Since the financial meltdown, it's become conventional wisdom that prior to the crisis, the world was awash in too much easy money—and that now it doesn't have enough. It's a tidy thesis, widely accepted. It's also wrong. What's remarkable about our post-crisis reality isn't that we're not capital-starved; on the contrary, we're still swimming in excess liquidity. During those months of panic, all that cash didn't evaporate. A lot of it just got stashed on the sidelines. Now the global pool is growing again, and the next market bubbles are already popping up.
Take equity markets. Worldwide, their total capitalization as of November 2009 was about $50 trillion, which is roughly equal to the pre-crisis level. That rebound is due in large part to the trillions in government bailouts and handouts, which provided a short-term economic jump-start (the longer-term effect is still very much up for grabs). As a result of such largesse, U.S. banks are now better capitalized than they've been in years and their stocks have rebounded. In China, $1 trillion in new government lending has flowed into the real-estate and equity markets, as well as into the commodities needed for that country's still strongly growing economy. This spending, in turn, has buoyed commodity-rich nations like the Gulf states, Brazil, and Russia. Given all that, it's no surprise that the sovereign wealth funds of nations like Abu Dhabi and Kuwait are once again booming. In fact, the only thing that's new in the global liquidity story is where the money is being held—increasingly, in the South and the East, which have done relatively well in the global crisis, rather than the West.
What does this mean for the future? Here, too, everything old is new again. For signs of what's to come, just look back to 2007, before the crisis hit. Now, just as then, investors with capital are desperately searching for high returns, and that is always a recipe for bubbles (and, eventually, for busts). With labor costs contained, and capital so abundant, there's also precious little inflation and low interest rates—more reasons to expect frothy markets. Where will the next bubble appear? Quite likely in emerging markets, today's darlings. While the United States may remain subdued for some time, chastened by the meltdown and grappling with its diminished influence, the mood in the rest of the world is perking up. Whatever the state of the markets, America's ego bubble has probably been deflated permanently. In places like China and Brazil, it has only just begun to grow.