Today, politics is polarized — and so is economics. There are those who believe in the system, who espouse mainstream economic theories without seeing their flaws in practice. Then there are those who say the economic system will collapse and there is no other alternative.
There are few thought leaders who offer a nuanced view—fund manager and economics professor Daniel Lacalle is one. In his book “Escape From the Central Bank Trap,” he offers practical solutions to improve financial markets and the economy from within the system, without buying into the mainstream economic fallacies. Using this approach, he covers the United States, Europe, Japan, and China, showing us how we got into this mess and how to get out.
“There is a tremendous opportunity for the world to show that financial operators, governments, and central banks can reorient their incentives and use their enormous power to reignite the growth of the middle class,” he writes.
And who could argue with this statement? Although Lacalle himself would like lower taxes, less regulation and central bank intervention, he says that getting there is only possible step by step.
The first important step is to stop pushing out cheap credit through central banks, commercial banks, and capital markets, which only leads to overcapacity and unproductive investments.
“Cheap debt tends to attract capital to low-productivity and short-term investments and leads to poor capital allocation. For example, it is no coincidence that nonperforming loans have risen in European countries and Japan at the same time as liquidity and low interest,” he writes.
Central Bank Fallacy
