What? No breaks?

The stated purpose of central banking is to ensure price stability. If the central bankers find that prices fall too much, they inject currency into the economy to stop them from falling. If they find that prices go up too much, they extract currency.

The thinking is that more currency will cause prices to rise and less currency will cause prices to fall.

The way central bankers operate this scheme is by buying and selling assets, typically government bonds or shares in large corporations. To inject currency into the economy, central bankers conjure up currency from nothing with which they buy financial assets. The central bank gets an asset and the seller gets currency with which to drive up prices. Conversely, to drive prices down, the central bank sells an asset. The currency received is then returned to null. With less currency in the economy, prices will fall.

Central banks expand money supply by buying stuff for currency created from nothing. They return currency to nothing by selling stuff.

Apart from the moral issue of giving a select group of people the privilege to buy stuff for nothing, there are two other problems with this system.

Prices are signals to the economy. A price rise signals scarcity and a need to invest. If this signal is countered by central bank interference, needed investments will not happen. Conversely, falling prices signal over-investments and a need to shift focus onto more productive activities. The stated goal of central banking is therefore an error in itself. Prices are important signals and should not be interfered with. The only possible result of their interference is distortion, and hence sub-optimal resource allocations.

Another problem is that central banks cannot in actual fact make prices go down over time. They can only make them go up. Price stability is therefore not possible. When a central bank buys shares in a corporation like Apple, it drives up the price of this asset. It pays more than what the market would have done on its own. The assets on the central bank's balance sheet have been acquired at too high a price. When the central bank sees core inflation go up and time comes to sell Apple shares so that currency can be drained from the economy, chances are that these shares have already fallen by quite a lot. People have already started selling Apple shares in order to cover rising prices in food, fuel and other essentials.

Determined to keep a lid on core inflation, central banks will sell their assets into a falling market. This puts additional pressure on asset prices. However, if core inflation is due to a real shortage of essential goods, core inflation may continue up even as currency is drained from the economy. Additional asset sales will be needed in order to keep prices down, driving down central bank asset prices even more.

However, there's not enough assets available on the central bank's balance sheets to withdraw sufficient currency to keep a lid on core inflation. Central banks are therefore powerless to keep a lid on a sudden spike in core inflation. As things stand right now, there is far more currency in circulation than there are assets on central bank's balance sheets.

Central banks can still inject currency into the economy. However, they have long since lost the ability to withdraw substantial amounts of currency. They can stoke prices higher, but they cannot put on the breaks. When core inflation stars rising, there is nothing central banks can do to stop it.