In modern economics, monetary stimulus is considered an effective tool to soften the economic cycle. While there are many theories about why monetary policy works, the dirty little secret is that it works by inflating asset markets. By inflating risk asset valuation, it leads to more demand for debt that turns into demand growth. In other words, monetary policy works by creating asset bubbles.
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Andy Xie: For Economic Stimuli, a Revolving Exit Door Another one. There are many other excellent passages in this article. I’m sad that I let it sit for three days in my browser before reading it. I highly recommend it (and the articles previously written by Andy Xie). He does an admirable job of explaining exactly how fragile things are on a global scale. The article also serves as an interesting forecast on how central bank policy might unfold. |
