The Fed, for the ninth time in a year, raised its benchmark short-term interest rate to 3.25 per cent last week. Remarkably, though, during this same period, long-term US interest rates have fallen.

The 10-year government bond yield fell from 4.6 per cent to just below 4 per cent over this same period.

To put this in perspective, it would be like Dr Reddy raising interest rates, and, in response, the HDFC [Get Quote] or ICICI [Get Quote] or SBI [Get Quote] cutting its housing loan rate. Hardly possible.

A conundrum, in fact, is what Alan Greenspan used to call it -- the fact that long-term US interest rates refused to rise even though short term rates were going up, oil prices were sky-high and the US economy was showing at least reasonable strength.

Under "normal" circumstances, all of this would have led to rising US long-term rates, which would have slowed down the on-fire US housing market and, in general, exerted a restraining impact on the economy.

That's how markets work. Or, how they're supposed to work.

So, what's happening? What is it that is making circumstances not normal?

There are, of course, more explanations than there are economists. But most of them are too arcane and none of them are convincing.

So, I thought we should start with the most obvious fact, following the lead of J Pierpont Morgan (I think) who, when asked why the market was going up, said, "Well, because there are more buyers than sellers, of course."

So, too the obvious reason why the yield on long-term US bonds is low because there are more people with money to invest (buyers of bonds) than people who need money (sellers of bonds).

As a result of this, bond prices are down and yields are high.

In fact, most assets are booming. Equity markets all over the world are close to all-time highs. Many commodity markets are at multi-year highs.

Real estate -- well, the main concern in global markets for nearly two years now is the "housing bubble" in the US, the UK and Australia; even in India, real estate, which had almost ceased to be an investment asset till a few years ago, is showing more than a little backbone.

Even art, an "alternative" investment if ever there was one, is rising frothily. Late in June, after Christie's sale of postwar and contemporary art, a London jeweler who is a serious collector, said of the high prices, "Either there's too much money around or there's no confidence in the financial markets�.When I see the[se] prices it certainly makes diamonds look cheap."

And closer to home, the first art fund has been launched, bringing the proverbial taxi-driver (albeit with 25 lakh to invest) to this asset class.

So, what does this mean? Are asset prices are going to explode? Liquidity-driven bubbles always end up like flat champagne.

Well. The answer must be "Yes", because bubbles always pop.

Unless, of course, there is some other process going on that can change the interface between the inside of the bubble (asset prices) and the outside (the value of money).

And, perhaps this might just be the answer to Mr Greenspan's conundrum -- the fact that the value of money (capital) has been falling steadily relative to the value of the only other determinant of economic value -- knowledge.

If you go back to the start of time, the person with knowledge (defined broadly to include physical and/or mental strength, commitment, creativity, etc.) always came out ahead.

As capital -- which was basically the accumulation of the value generated by applying knowledge -- began to hold sway, this intrinsic value of knowledge began to decline.

If you had money, you could make money. Of course, knowledge did still enable value creation -- smart people often did get ahead.

But seldom without any access to, or obeisance to, capital.

Well, times change. Welcome to the New Economy. As an old friend likes to say, what goes around comes around.

The richest man in the world today did not start out with much capital. And, more and more, knowledge is climbing back to its -- I like to think, intrinsic -- position of preeminence.

In other words, the value of capital-money -- is falling relative to the value of knowledge. Which may explain why there's so much of it � money -- sloshing around.

BusinessWeek has an article titled "Too Much Money", in which it reports that US corporations have the equivalent of $542 billion (close to India's GDP) as undistributed corporate profits, and that this number has almost doubled in the past two years.

Closer to home, Business Standard has reported that 700 Indian companies had nearly $7 billion of cash on hand, compared to less than a billion last year.

This could mean that companies are extremely risk-averse -- they are holding on to cash because they fear the future.

But most other indicators of risk -- volatility of global financial markets, for one -- are signalling high risk-taking behaviour on the part of investors.

Further, global growth and growth prospects are all high (for the US) to very high (for India).

The other possibility is that the value of capital has fallen. Which is why the returns on so-called risk-free capital are so low and, incidentally, have been low -- less than 6 per cent for 10-year US government bonds -- for nearly a decade.

To my thinking, they will continue to remain low (and, perhaps, even fall further) till such point as the value of knowledge -- determined, say, by the price of education -- reaches stratospheric levels.

I know there are people who believe that education costs are already very high. I believe that they are much too low -- just do a discounted cash flow valuation of the earning power of, say, a Harvard MBA or an IIT degree and compare it with the cost.

For India, which has huge education needs in the immediate present, this could be terrifying. Till we recognise that financing these huge education needs will be easy -- perhaps it's time to set up an Education Development Finance Corporation!