Central banks must carry the can for the state we're in

Central banks’ efforts to prevent markets adjusting have led to a dangerous social and financial disequilibrium, says Tim Lee.

Regent Street during lockdown
Were extreme measures such as lockdowns used to prevent asset prices from plummeting?
(Image credit: © Chris Jackson/Getty Images)

Supply shocks, rising prices and labour shortages are in the news. Analysts blame specific factors, ranging from the strength of the economic rebound to Brexit. The likely reality, however, is that the phenomena we see are connected and interconnected with social and political developments. The financial system’s interaction with the economy forms a complex, evolving system, which consists of a multifaceted web of relationships and forces with “emergent properties”, meaning that the result of these interactions can be greater than the sum of their parts. It is very difficult, if not impossible, to understand all these interactions and predict their consequences.

This is particularly true when the system has been subject to massive interventions, such as those seen over the past two years: lockdowns, businesses being supported and governments paying people not to work, huge public deficits, and unprecedented central-bank interference in markets. The economy and financial markets are at an extreme disequilibrium.

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Tim Lee is an economist and a co-author, together with Jamie Lee and Kevin Coldiron, of The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (McGraw-Hill, 2019)