{"id":3685,"date":"2015-07-29T19:43:01","date_gmt":"2015-07-29T14:13:01","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3685"},"modified":"2015-07-29T19:43:01","modified_gmt":"2015-07-29T14:13:01","slug":"too-much-debt-too-little-growth-and-too-low-interest-rates","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/07\/29\/too-much-debt-too-little-growth-and-too-low-interest-rates\/","title":{"rendered":"Too much debt, too little growth and too low interest rates"},"content":{"rendered":"
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\nVivek Kaul<\/p>\n
The financial crisis that started in September 2008, after the Wall Street investment bank Lehman Brothers, went bust, led to the economic growth stagnating in large parts of the world.<\/p>\n
The central banks around the world tackled this by cutting interest rates to very low levels. The hope was that at low interest rates people would borrow and spend. At the same time, corporates would use this opportunity to borrow and expand. And this would lead to economic growth coming back. QED.
\nBut that is not how things panned out. Instead of prospective consumers borrowing and spending money, large institutional speculators borrowed money at low interest rates in large parts of the Western world and invested it in financial markets all over the world. This excessive inflow of \u201ceasy money\u201d has led to bubbles in financial markets in large parts of the world.<\/p>\n
This point is made in the latest annual report of the Bank of International Settlements (BIS) based out of Basel in Switzerland. The BIS is often referred to as the central banks of central banks. As the BIS annual report for the financial year ending March 31, 2015 points out: \u201cvery low interest rates that have prevailed for so long may not be \u201cequilibrium\u201d ones, which would be conducive to sustainable and balanced global expansion. Rather than just reflecting the current weakness, low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.\u201d<\/p>\n
This is a very interesting point. What BIS is saying is that low interest rates have led to very little economic growth. At the same time the total amount of global debt has gone up (as can be seen from the accompanying chart). In order, to tackle this low economic growth rate, the central banks have either cut interest rates further or maintained them at their low levels. In fact, several central banks in Europe have also taken their interest rates into negative territory i.e. you have to pay money in order to deposit money with them. Hence, lower interest rates have led to further lower interest rates without creating much economic growth.<\/p>\n
As can be seen from the accompanying table, the total global debt has touched around 260% of the global gross domestic product (GDP). In 2008, it was around 230% of the global GDP. It\u2019s a weird economic world that we live in. While the low interest rates did not lead to economic growth as was expected, they did lead to financial market booms.<\/p>\n