The central bank heads in Jackson Hole, Wyoming, appeared reasonably satisfied with themselves. The common policy of flooding the financial markets with money was assumed to have prevented a major economic depression, and the global economy to be bottoming out. The chief proponent of this policy, Mr. Bernanke of the U.S. Federal Reserve, set the tone with an optimistic assessment.

Stock markets and commodity prices have shot upwards since March. Fundamentals, however, are still bad if not awful. Unemployment continues to rise; whole industries, such as housing, automotive and shipping, are at depression levels; foreclosures are setting records, and the consumer is pulling back. The stock market rise of 50 percent is way ahead of a real economy still bumping along the bottom.

Such discrepancies raise a key question: are the positive news inconsequential ripples in a still deepening crisis, or a sign of basic improvement?

The answer depends on the explanation given for the crisis. The conventional wisdom assumes that financial markets were struck by a crisis of confidence leading to a liquidity freeze. A flood of cheap money provided by governments has addressed the issue, and we are back on track to renewed economic growth.

We prefer another explanation, under which the cause is not a lack of liquidity, but a growing excess of it.

A vast and growing pool of loose money has been created worldwide, in particular by large and continuous U.S. trade and budget deficits.

At the same time investment opportunities have been restricted through the migration of entire industries to countries such as China, which severely limit foreign corporate ownership. Share buy-backs and private equity takeovers in the West further shrank the pool of available assets.

The result is a growing unbalance between supply and demand: too much money chasing too few opportunities, leading to asset inflation, rampant speculation and an intensifying boom and bust cycle.

The first warning bell was the Asian crisis of 1997, caused by over-investment followed by catastrophic capital flight. The second bust was the Wall Street dotcom bubble in 2001.

The third was the 2002-2006 U.S. housing boom in which the value of U.S. real estate was wildly inflated. In addition a whole class of assets of dubious value was created to soak up the flood of money seeking returns. These assets were the true cause of the financial crisis.

The fourth boom was in commodity futures, leading to the 2008 spike in oil and grain prices. Fuel and food prices followed, chilling U.S. consumption and transferring the financial bust to the real economy.

Each boom came right on the heels of the preceding one, fed by the ever growing pool of global liquidity.

Under this scenario the current central bank and government policy of flooding the financial system with money actually aggravates the fundamental supply and demand imbalance and leads to an intensification of the cycle. Whatever temporary recovery it may create will be followed in short order by a larger bust.

This is already apparent in stock markets around the world. There is no way that a depressed real economy can absorb the funds shoveled out by central banks and governments. Very little of it reaches the general population. Most of it is already finding its way into stocks, commodity speculation and real estate.

In the meantime massive government intervention has impaired market mechanisms and productive investment. In the current climate financial speculation is far more profitable.

In essence the prevailing policies are turning instability from a cyclical to a permanent condition, with any number of possible events capable of precipitating a new crash.

When and where such a crash would occur is difficult to predict, but we expect it to be soon, most likely this year. We also think it likely that it will be triggered by events in China, where government intervention to stimulate the economy has been most intense.

Stimulus spending and government-ordained credit expansion amount to roughly 40 percent of Chinese GDP. There is no way such sums can all be turned into productive investments, and speculative bubbles have already formed in the stock market and in real estate.

Remedial action by the government is limited by the need to present a positive facade during the 60th anniversary celebrations of the Peoples Republic of China. Beyond that loom the factional struggles leading to the next leadership change.

A similar situation exists in the U.S., with the 2010 congressional election looming on the horizon. The Beijing-Washington axis is in for a bumpy ride, and until effective policies are implemented it will only get bumpier.

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