Central banks are subordinate on two fronts

Central banks in the recent period have become subordinate to both: Governments, given the need to monetise fiscal deficits to maintain fiscal solvency; Financial markets, given the need for perpetual monetary expansion to stave off a downturn in markets and a liquidity crisis: all attempts at monetary normalisation are aborted due to the negative reaction of financial markets. Once this “double dependency” has been created, we fail to see how central banks can escape it. This suggests that the most likely scenario is one where central banks never correct the size of their balance sheets and where real long-term interest rates remain negative .