Nothing lasts forever, nor will QE3; even delay in tapering may not benefit India

Speculation whether the US Federal Reserve chairman Ben Bernanke will reduce bond purchases by $10 billion a month to $75 billion or more matters much for speculators, and not the US economy. Whether the printing of currency in the name of QE3 begins to slow in September, or December, the go-go years of cheap money are over, unless another Lehman erupts because of taper.

Emerging markets which were having a free ride because of capital flows face rough seas. Even if the Fed delays the tapering, countries such as India may not benefit much because return expectations are plumbing new depths.

A Bloomberg poll showed India offers the worst investment opportunity among major markets. Repairing of the economy will help more than Fed delaying the taper. The argument that the unemployment rate is still above 7% in the US and that the economy has not fully recovered is turning a Nelson’s eye to the issue.

Probably, Bernanke is looking for an exit that will save him the criticism that his predecessor Alan Greenspan faced. Bernanke would like to be seen as the one who saved the US from the second great depression, but not for fuelling another asset price bubble.

S&P 500 at record highs and climbing real estate prices should be worrying Bernanke when unemployment is more than 7%. If asset prices climb steeply whatever recovery the US economy has achieved may be washed away.

The taper message is that prices, including assets, should climb modestly for a sustained economic growth failing which an economy squanders its opportunities. If zero-interest rates and unlimited printing of currency were passport to prosperity, human civilisation might have figured it out centuries ago.