Role of central bank and speculation

 

The central question is whether central banks can contain the instability of credit and slow speculation to avoid its dangerous extension. - Charles Kindleberger Manias, Panics, and Crashes

"It was the zero-percent era that made a 5%-plus rate dangerous." - Jim Grant of Grant's Interest Rate Observer

"If the invention of interest was the greatest invention in finance back five millennia ago, then negative rates are probably the dumbest idea in the entire history of finance and we’ve just been living through it." - Edward Chancellor with Grant Williams

Central banks created the current speculative mess and continues the excesses as it tries to stop the instability of credit and slow speculation. Powell is doing everything he can to stop inflation but at the same time he is trying to stop the speculative excesses of the post Great Recession period and the COVID pandemic. 

We know there is an equity market excess given the high valuations and we know that bond markets still do not reflect a real rate tied to long-term growth with a term premium. Zero rates created the excesses and now we must have high rates to arrest these extremes. Negative interest rates in the EU were just a further manifestation of the zero-rate policy in the US. You can also say that the inflation of the last two years is a just a result of a spending bubble from strong monetary and fiscal policy. Relative prices during the pandemic changed dramatically but central banks stopped the process of production switches through providing money to smooth the adjustment. 

While the focus has been on inflation (goods prices), the real battle is whether central banks will hold firm on rates if there is a sustained decline in asset prices.