Central bankers are the high priests of high finance. That’s because they control high-powered money, commonly known as the monetary base, or the sum of currency in circulation plus commercial bank deposits with them. By buying government bonds from banks or the market (which expands central bank balance sheets), the commercial bank reserves rise, improving market liquidity and therefore tend to reduce short-term interest rates.

In effect, central banks affect market sentiment by expanding their balance sheets (technically called quantitative easing), since buying long-term bonds lowers their yields, whilst increased liquidity lowers short-term rates, thus changing the whole interest rate curve. When central banks tighten liquidity, interest rates rise, affecting asset prices and impact the real economy through influencing economic growth and jobs.

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Central banks seek to implement monetary policy to maintain price stability and financial stability, which is today seen as a professional and technical job requiring autonomy of operations, if not policy independence. However, one should never forget that the first central bank was created in Sweden in 1668 to finance the government and operate the bank clearing house. When the currency was pegged against gold (the gold standard), central banks operated a simple rule – no gold, no monetary creation.

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However, governments quickly found out that central banks can fund huge government deficits at the risk of inflation. Governments with high debt do not like high interest rates, since there comes a point when the fiscal debt interest........

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