Commentary - The Liquidity Pacifier

I have to say in advance that this posting has nothing much to do with Reits or investment. Just some interesting thoughts with a little connection to the general market. You may safely skip this if you want. Here goes:

I have a child who is currently about 3 years old. When she was still a baby, we have given her the pacifier. I have to say the pacifier is really one of the greatest invention of mankind. It works much better than expected, helping her to sleep better and cry less. However, we also understand that there are some potential negative effects associated with prolong use of the pacific, like dental and speech problems. So recently, we have decided to take away the pacifier from her. She has been receiving cold turkey treatment for the past few days and I can assure you that it is not a pleasant experience for us all. She will cry for the pacifier before she sleeps. She will cry for the pacifier in the middle of the night when she realizes there is no pacifier, and this can happen 2 or 3 times over the night. She will cry for the pacifier when she wakes up in the morning. When it comes to her afternoon nap, all the above will go through one more cycle.

So what has all these got to do with the market? Well in 2008 after the fall of Lehman, Central banks all over the world, especially the US, have to inject liquidity into the markets to 'pacific' them. In 2009, we find that the liquidity injection has worked much better than most of us have thought. Not only has it pacified the market, it has brought about a super strong rally. But the Central banks are also well aware of the prolong effect of too much liquidity in the market, such as inflation and creation of asset bubbles. So one of these days, they will definitely need to pluck out the 'liquidity pacifier'. When that happens, we have to see whether things are going to be ugly. But to take a positive view over this, we are taking the pacifier from our girl because we feel that she is ready for the next phase of her life. So it may not be a bad thing after all because the world economy may be ready by then for the next phase of growth without the 'liquidity pacifier'.