Resource: The Rise of Carry
The bursting of a carry bubble can increase GDP in the long run because economic resources will no longer be tied up in unnecessary bubbles. However, if central banks intervene, the carry regime will continue, and over time, a new carry bubble will likely emerge as part of the cycle.
Why is this important: If we genuinely want to prevent bubbles before they form, we need to dismantle the carry regime. If bubbles have already formed, they should be burst immediately to allow the economy to begin recovering more quickly.
Where do we use this knowledge: When discussing government and central bank interventions, the debate often centers around two options: if they intervene, it creates moral hazard and high prices that perpetuate a high cost of living. If they don’t intervene, it may harm the economy and people in the short term. However, the larger issue is that resources are being misallocated to sustain carry bubbles, which don’t truly benefit the economy. Bursting the bubble stops this. Central banks should cease their role in supporting carry regimes.