What Do Central Bankers See?

Share this article

Short U. S. interest rates have remained at the zero bound for years. Longer rates are only marginally above all-time lows. Most remarkable are European rates, which have descended to the lowest level on record. In some countries, that history spans more than 500 years. Such a phenomenon reflects something other than worry about a mere weak domestic or world economy. Over the decades and centuries the world has experienced all manner of economic weakness, yet rates have never before fallen to these levels. What horror must central bankers see that would justify the lowest or near lowest rates in history?

Developed countries may have painted themselves into such a corner– especially through recent years’ actions by central bankers–that they simply can’t allow rates to rise appreciably in the foreseeable future. With debts having grown to levels that have historically led to economic malaise, future danger is undoubtedly apparent. Perhaps Japan suggests itself as a dire precedent to countries that have not yet felt the debilitating effects of deflation. Central bankers may see all too clearly how heavily debt service will weigh on future economic growth when rates eventually rise. Notwithstanding the many economic and market distortions that are becoming manifest, central bankers may believe they have no choice but to bet the ranch on their grand monetary experiments. They are apparently willing to risk inflation–even hyperinflation–to prevent the destructive effects of deflation in a debt-laden world.

Acknowledged authorities of debt crises through the centuries, Carmen Reinhart and Ken Rogoff contend that developed country central bankers are whistling past the graveyard if they expect to grow their way out of the current debt overload. Almost certainly, developed countries will suffer debt restructurings. Central bankers’ worst fears could materialize with a contagious debt default spiral.