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hina has been the focus of global economic interest since a recent devaluation of the yuan followed by turbulence in its share exchanges. As other stock markets experienced their own bouts of volatility, policy makers and investors around the globe blamed China for their own woes.

For the most part, China is the author of its own ongoing economic and financial distress. However, it is also a victim of the global '€œmonetary madness'€ engineered by the 3 largest central banks, i.e., the Bank of Japan, European Central Bank (ECB) and the US Federal Reserve.

 Alas, China is not alone in being victimized by the monetary central planners of these countries.

The rest of the world may also suffer from what may someday become known as the '€œMother of
All Corrections'€ due to imbalances and distortions arising from so-called '€œunconventional'€ monetary policies.  

Consider that zero interest rate policy and creating oceans of liquidity (i.e., quantitative easing) have induced investors to take increased risks and acquire mountains of highly-leveraged debt. For example, total global debt grew by US$57 trillion to $199 trillion since 2007, an increase of over 40 percent.

The ratio of total debt to gross domestic product (GDP) hit 286 percent in the second quarter of 2014, up from 269 percent in the fourth quarter of 2007. And government debts grew by $25 trillion since 2007 with the share of GDP for 10 countries exceeding 100 percent.

It would be difficult to argue that either expansionary monetary policy or massive and persistent budget deficits have sparked strong economic growth. It is easier to see that the primary effect of unconventional monetary policy instruments has been to inflate bubbles.

Central bankers have become increasingly adept at blowing bubbles while denying that they have been doing so. This is because the primary metric of central bankers to determine whether monetary expansions have gone too far is the rate of increase in consumer prices. As long as consumer price indices remain tame, it is full steam ahead with pumping more money and credit into the financial system, perhaps joined by endless rounds of fiscal deficits.

Their myopia about the impact of extremely-loose monetary allowed them to ignore the other consequences of an inflated money supply.

Pumping newly-created money and cheap credit into an economy clearly goes beyond the impact on consumer prices. It can and does affect asset and commodity prices.

And so, the influx of fresh money gave investors access to artificially-cheap credit so they could buy assets (or perhaps commodities) that helped form bubbles.
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Central bankers have become increasingly adept at blowing bubbles while denying that they have been doing so.

As these formed and early investors began to take profits, they took their winning into a different asset class or a different commodity that started a new boom-bust cycle.

 In turn, there have been bubbles in various economic sectors, (e.g., the dot.com bubble and real estate bubbles) or in commodities (e.g., oil price bubble and gold bubble).

Now we are living with a global bond bubble spread in part by interest rate arbitrage (i.e., the '€œcarry trade'€) that helped inflate returns and economic growth in emerging markets.

 The '€œcarry trade'€ involves hedge funds or banks borrowing either yen or dollars at low interest rates, converting to other currencies that offer assets with higher yields. (For example, Indonesian government bonds are paying in excess of 8 percent.)

A large spread between borrowing rates and yields on other assets reduces the likelihood of net losses that could occur from adverse foreign exchange movements.

 What seems to be happening now is a reversal of the dollar '€œcarry trade'€ that is driving liquidity out of emerging markets and depressing their exchange rates against the dollar. Since June 2014, the dollar'€™s trade-weighted value has risen by more than 17 percent, even more against most emerging market currencies.

But make no mistake about it, an inevitable market crash will be blamed on the usual suspects, all of which are actually symptoms rather than causes.

When the bubble in financial assets bursts, fingers will be pointed at shrinking corporate profits, competitive devaluations, falling oil prices, geopolitical tensions, Greece, etc.

 Consider that inflating the money supply within an environment of ultra-low interest rates has flooded global financial markets with liquidity and encouraged greater risk-taking. Instead of engineering economic recovery, these monetary machinations have made the financial system much more fragile.

And the longer these expansionary monetary policies continue, the more fragile financial markets will become. And the more fragile financial markets become, the more terrible will be the market correction that follows.

As US central bankers ponder raising benchmark interest rates for the first time since 2006, the ECB announced its own new round of liquidity in the form of quantitative easing.

For their part, eurozone central bankers seem to think it is their duty to delay the day of reckoning that might be triggered by a retreat in dollar liquidity.

Among the wonders of modern monetary policy is the fact that the ECB put interest rates into negative territory for member banks that hold reserves with it.

This unprecedented step is likely to encourage banks to try to cover the cost of holding reserves by trying to push deposit rates below zero or increase fees on bank accounts.

It is hard to imagine that the net result will be to increase aggregate demand, as is presumably the reason behind expansionary monetary policy. First, it will dampen the incomes of households that depend on interest earnings from saving. Second, new or expanded businesses will find it more expensive to borrow.

Meanwhile, capital requirements under Basel 3 discourage business lending since the risk-weighting for commercial loans is from 100 percent to 150 percent, requiring that banks set aside larger capital and liquidity buffers.

Now the monetary central planners are being held hostage to a series of financial bubbles of their own making. The Fed knows that it cannot keep interest rates so low forever. But it wants to execute an orderly '€œexit'€ from its follies.

History and theory provide reasons to doubt that central planning, whether of monetary matters or of entire economies, can be successful.

Therefore, the planned exits from unconventional monetary policy will almost certainly not be orderly. Indeed, it is most likely that there will be an ugly, disorderly rout as market forces begin to assert themselves.

 A stampede is likely to occur once there is a general loss in confidence that the monetary expansion process will not go on forever. As the credit expansion process slows down or halts, stock punters and bondholders will find themselves amidst a mad crush as they all head for the exits at the same time.
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The writer is research fellow at the Centre for Civil Society in New Delhi and visiting professor of economics at Universidad Francisco Marroquin in Guatemala.