Finance is Not the Economy
An interesting read but I think it&#x27;s just the same old &quot;pushing on a rope&quot; situation that people who have been following economic news are already familiar with.<p>The problem is that central banks are tasked with trying to solve something they are fundamentally incapable of solving on their own.  They can QE or reduce rates until the end of time to try and stimulate growth but it has a limited effect on the real economy.  Note that it does have <i>some</i> effect on the real economy so it&#x27;s not completely useless but on its own it isn&#x27;t good enough.<p>The players in the market, including both the finance system and individuals, take note of the low interest rates and just increase their leverage into bubbles.  As the central banks keep pumping, so do those bubbles inflate.  Why would anyone invest in productivity or infrastructure when the governments are signalling you will make a lot more money speculating on bubbles and we will keep backing you up in doing that.  Cheap money is a double edged sword.<p>The real solution IMO is two-fold.  First we must accept that at least right now we will not grow our economy as fast as we used to.  Second is that rather than trying to stimulate the economy by QE and lower rates the governments should be investing in infrastructure and start normalizing rates (with respect to new realistic growth targets).<p>The crazy thing about all of this is that at a time governments should be borrowing like crazy (like everyone is doing) to finance their investments because it&#x27;s so cheap to borrow they are trying to reduce their debt and expenses (with the extreme being &quot;austerity&quot;).  Everyone else is acting fairly rationally except the governments.<p>EDIT: As some of you already know, there is a direct connection between interest rate expectations and asset pricing.  So in a sense it is inevitable that the expectation of long term low interest rates will result in asset bubbles.  If the long term rate expectation is zero then assets with any non-zero return should be valued at infinity, i.e. dividend stocks, houses etc.  Central bankers are absolutely aware of this as they are aware that raising rates will cause asset prices to go down with all the implications.  That&#x27;s why they are stuck at the token 0.25% raise.  If the US ever goes negative rates then you&#x27;ll know we&#x27;re in real trouble.