Why Norman Chan can turn those anti-bubble guns away

Hot money heads our way as Fed frees up billions

SCMP headline, November 5

And then we had Norman I-am-Donald's-Boy Chan Tak-lam of the Hong Kong Monetary Authority warning everyone to stay alert and not buy property just because interest rates are low.

Are you sure, Norman? I would have thought low interest rates were a very good reason to buy property, particularly if the latest news has the Fed keeping those rates low for another long spell. But then I also thought that monetary chiefs were not meant to offer specific investment advice.

Oh well, perhaps Norman was distracted by the need to stand on guard, presumably on Waglan Island somewhere, binoculars on chest, peering at the eastern horizon for the first sign of that approaching bubble of hot money headed our way, his anti-bubble guns pointed skywards on either side of him, Spitfires at the ready behind him.

Let's quantify the nature of the threat. Is it true that a bubble of hot money in the United States, which we shall define here as a sudden expansion of the M1 measure of the money supply, translates into a similar expansion of the Hong Kong dollar money supply?

The first chart says that, broadly speaking, yes, it does. It is only what we would expect from a formal currency link with the US dollar. But it does not always happen and it does not happen immediately. That said, it certainly did happen with the stimulus that the US government applied to the US economy in late 2008. Then follows another question. Is it true that the ups and downs of the M1 measure of the HK dollar money supply translate into similar ups and downs in our property market?