According to an economic theory called the Unholy Trinity, governments can only ever have two of the following three things: pegged exchange rates, independent monetary policy and free capital flows.
The reason why this is so is quite complicated. But the point is that they must choose two of the three, making the third a pressure valve for the problems created by their attempts to control the other two.
Of course, governments occasionally try to have all three. But it always ends in humiliation. It’s only a question of when.
In this context, humiliation may mean the breaking of the (managed) currency peg. Think of what happened to sterling on Black Wednesday, 16 September 1992, when the currency was forced out of the Exchange Rate Mechanism (ERM) and subsequently plunged.
Alternatively, humiliation may mean the loss of control of monetary policy, and rampant inflation. There are plenty of contemporary examples.
Finally, humiliation may involve massive capital flight from the country in question, which results in the imposition of capital controls. Apartheid-era South Africa provides a good example.
Just look at the news today for the latest example of the Unholy Trinity being on the move…
In Japan, the authorities re pegging interest rates low to help the economy and the government deal with too much debt. This is a major reason why the yen has been hammered in foreign exchange markets this year.In the UK, there are fears of a currency crisis because interest rates can’t go higher without triggering a debt crisis.In Sweden, the central bank was forced to hike interest rates a full percent to try and stem the tide in the falling currency.The pressure valves are whistling. Currencies and monetary policy are colliding with each other. And policy makers are being humiliated.But what about the third part of the Unholy Trinity? For now, […]
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When I left my cushy corporate job in 2017, I did so knowing that my family would have to make sacrifices. But I couldn’t continue to watch the nation slip into oblivion and was inspired by President Trump’s willingness to fight the good fight even at his own personal expense. What I didn’t realize then is that conservative media would be so heavily attacked, canceled, and defunded that the sacrifices would be extreme.
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