Government interference in the economy produces what a systems analyst would call an unstable state. From Nick Hubble at fortuneandfreedom.com:
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.
