The Trap Set by Financial Markets

Monetary policy has become a slave to boosting asset prices. Sound money has given way to speculative impulses as major central banks suppress interest rates and investors search for yield by taking on more risk. The disconnect between the real economy and financial markets is evident not only in China but in the United States, Japan and Europe.

Unconventional monetary policy since the 2008 financial crisis has ignored the reality that financial stability flows from monetary stability and that when central banks engage in financial repression asset bubbles are sure to develop. Negative real interest rates are unnatural: they harm savers, spur speculation, and misallocate capital.