How Central Banks and Lockdowns Are Making the Crisis Worse

by Frank Shostak

What typifies the phenomenon of the boom-bust cycle is that it is recurrent. What is the reason for this?

Loose monetary policies set the platform for various activities that would not emerge without the easy monetary stance. What loose monetary policy does here is to engineer the transfer of real savings from wealth generating activities to artificially stimulated activities, which we can label as bubble activities.

Over time, these loose monetary policies begin to manifest as increases in price inflation (consumer prices, producer prices, and/or asset prices) and various forms of distortions that economists call overheating.

To counter these side effects the central bank may reverse its earlier loose stance, as happened in 2018 when the Fed allowed interest rates to slightly rise and slightly cut back its balance sheet.

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