- A Perfect Storm for a Liquidity Crisis?
by James Gorrie, https://www.theepochtimes.com/
New study outlines the very real possibility of central banks creating a liquidity crisis by the end of the year
Efforts to curb inflation by central banks, particularly the Federal Reserve (Fed), may well trigger a liquidity crisis in the markets. That’s the assessment of University of Bath researchers, which claims that excessive anti-inflationary policies could create a money shortage within this calendar year. Moreover, it shows that central banks can be a destabilizing factor as well as a stabilizing force in the economy with both inflationary and deflationary policies.
A Prime Example: 2008–09 and Beyond
For example, the Bath study determined that during the financial crisis of 2008–09, central banks’ policies created more uncertainty in the markets, not less. That increase in uncertainty sparked market volatility, which, in turn, spooked investors. The fearful investing environment of that time made investors more conservative. As a result, money flowed out of the markets and into lower-risk areas, which made the markets even more unstable and ill-liquid.
The researchers noted that central banks’ rush to stimulate economic growth with artificially low-interest rates and so-called quantitative easing (QE) over the past several years has been excessive and is a significant factor in today’s inflationary trend. Low-interest rates incentivized excessive consumer and corporate borrowing, which drove inflation in stocks, housing, cars, and other markets.
Central Banks Are Inflation Arsonists
What’s more, it has been said by economists such as former Federal Reserve Chairman Paul Volcker and Joshua R. Hendrickson, assistant professor of economics at the University of Mississippi, that central banks are the root cause of inflation.