WSJ: Blackstone's World of Cash

Will the private equity party -- this week's Blackstone IPO is icing on the cake -- end with a bang or a whimper? Let's recall that on Friday, Oct. 13, 1989, the almost $7 billion employee-led buyout of United Airlines fell through, a bookend on a wild 1980s of junk bond-led takeovers. The Dow dropped 190 points that day, almost 7%. That's 1000 points today. Ouch. Could it happen again?

Sure. The money involved here ain't small potatoes. Private equity funds raised $221 billion last year, up from $33 billion 10 years ago. There are now over 170 private equity funds with more than $1 billion in assets. The value of deals done last year was $475 billion, up from $37 billion five years ago. Most of it was taking public companies private -- Equity Office, HCA, Harrah's Clear Channel and on and on.

What's fueling the boom? With the Dow over 13,000, it's not like there's lots of cheap companies just begging to be bought and turned around. Rather, the world has been awash in cash. The money supply has been growing like a weed at the same time that the federal deficit is shrinking -- $148.5 billion through the first eight months of budget year, down 34% from last year. As our trade deficit with China grows, they keep buying our long-term bonds. Add to that the Japanese carry trade (borrow in Japan at negligible interest rates and invest elsewhere), and you get distortions -- especially from fixed income investors such as banks, insurance companies, pension funds and hedge funds, all chasing higher yields.