MarketWatch/Raghuram G. Rajan and Viral Acharya/10-8-2022
“Put differently, the larger the scale and the longer the duration of QE, the greater the liquidity that financial markets become accustomed to, and the longer it will take for central banks to normalize their balance sheets. But since financial, real, and fiscal shocks do not respect central banks’ timetables, they often will force fresh central-bank interventions, as we saw in the U.K. Monetary policymakers thus find themselves in a very difficult position.”
USAGOLD note: Not exactly a revelation to those who frequent this page, but this essay does detail the mechanics of a possible new financial crisis based on suddenly “vanishing” liquidity, i.e., the circumstances that forced a Fed pivot in 2019 and the UK’s pivot a couple of weeks ago. Rajan, a former governor of the Bank of India, worries that the burgeoning lack of liquidity will prolong the fight against inflation – a polite way of intimating that central banks are likely to have a difficult time containing it.
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