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There is only ONE reason and has been the criminal/ manipulative activity of the Central bankers with QE, artificially low rates, manipulation of the financial markets and creation of money.
The past instability of the market economy; the destruction of the financial mechanism; and the future instability/crash is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process. A monopolistic governmental agency like a central bank can neither possess the relevant information which should govern supply of money, nor have the ability to use it correctly and the effects are visible in the bond, commodities, currency, derivatives, shares' markets. They simply do not make sense as TE said
Why do you consider covered interest parity an old law? In general it explains the relationship between IR and FX rates extremely well; of course relative GDP growth, FDI, current account deficits and especially capital controls distort capital flow a lot. But interest rate parity is an excellent predictive model, as good as any you are ever likely to find in the field of economic science.
Thank for your exemplary reply. Just a small point. Of course, the investors will be happy with loose monetary policies that create bubbles. I am not so sure they will be so happy when the bubble will exploit
I wouldn't go as far as to say criminal but many investors have indeed been happy with loose monetary policy despite the low yields because it stopped asset values from collapsing. It's the consequence of formalising the Greenspan put and doing everything possible to maintain asset values until the wealth effect returns and then push for deregulation and lower taxes to get the merry-go-round going faster again.
Since you're into it maybe there's some gambling and charity involved? Any ideas from other brilliant folks reading the TE's speculative article...
When the bubble bursts investors will expect governments and central banks to bail them out again.
The article reminds me of several that Buttonwood wrote prior to the 2008 crash where the signs were obvious to some at least that things were out of whack. The problem now, as then, is that, because nobody can reliably predict the end of the boom, the smart money, with some justification, expects to be able to get out of the market before things get really bad: they'll always be a dupe to sell to.
Commentators have for years correctly highlighted the problem with the massive intervention of central banks: it will lead to the next bubble. But nobody wants to hear this because they're all expecting to make their money before it happens: which plenty of them already have.