For years, we have been warning about dire consequences if central banks continue to meddle in the economy and financial markets. In December 2013, we wrote
There is a serious possibility that the measures taken by the central banks have already created a situation in which their actions increase rather than decrease financial instability. This is due to the fact that, if the actual price of an asset does not meet its market–based value, the true level of risk is not properly revealed.
During the “Coronavirus rescue” by the major central banks from March through June of this year, we essentially ran down the clock. No viable paths remain to escape the vicious feedback loop between central banks and financial markets – at least without serious repercussions.
Over the years, central banks have created conditions where prices in capital markets—and by implication, the resulting capital allocation structure—have become distorted to a previously unimaginable degree.
This has resulted in three extremely troublesome fragilities at the heart of the world economy.