Is the unthinkable becoming routine?

A few years back Andrew Haldane, the Chief Economist at the Bank of England, told a British parliamentary committee that global interest rates were at the lowest-ever level.

A wise colleague challenged him afterwards, “How do you know they were not lower in Babylonian times?”
Recalling this exchange at a speech given recently to the Open University in London, he told his audience, “Several exhausted research assistants later I can report that, luckily, I was on safe ground. Interest rates appear to be lower than at any time in the past 5000 years.”

The history of money

We should probably not be surprised at the longevity of the historical record of interest rates.

However, this continuous and detailed record of what could be called “the history of money” sits rather uncomfortably with our limited ability to understand just how money works.

As it happens, Andrew Haldane’s latest speech mentioned above was delivered within days of the Bank for International Settlements’ (BIS) 85th annual report.

The BIS economics team was lead by Claudio Borio, Head of the Monetary and Economic Department.

The timing of these contributions to the global debate on why the recovery from the global financial crisis has been so slow and fragile is quite auspicious.

The US Federal Reserve (Fed) is in the process of deciding when to begin returning interest rates towards their historical level.

Up until last week’s sharp correction across global equity markets, the first step of tightening was expected to occur at the Fed’s September meeting.

The 2 per cent rule

Haldane and Borio agree that ultra-low interest rates are wreaking damage.

According to Haldane, “The psychological scars of the Great Recession, as after the Great Depression, have proved lasting and durable.

“They help explain the sluggishness of the recovery, and the adhesiveness of interest rates, since the crisis. And if the past is any guide, these scars may heal only slowly.”

Recession risk

Then there is precaution risk. Based on historical data that dates back to 1945, the probability of a recession runs at around 12% or around one year in every 10.

Haldane believes, “If financial markets’ guesses about interest rates are realistic, it is oddsagainst there being sufficient monetary policy headroom to cushion a typical recession”.

After Australia’s long run of recession-free years, a return to a typical pattern of recessions could be traumatic for an economy that has become quite complacent about such a development.

Economic time moves slowly

Claudio Borio shares Andrew Haldane’s concern about the incremental and extended duration of economic change, of just how long it takes for the scars of the casualties to heal.

He said when outlining the BIS annual report, “You’d hardly know it from financial markets’ constant frenzy and round-the-clock media razzamatazz that eggs them on. But economic time moves slowly, much more slowly. The developments that really matter and shape our lives take a long time to unfold.

“Economic time should be measured in years or decades, not in minutes or microseconds.”

And like Haldane he has been confounded by the behaviour of interest rates in the face of massive stimulatory measures launched by central banks.

Up until last week’s rout in financial markets, all of the macroeconomic indicators were flashing green – except interest rates.

Borio pointed out that interest rates “have been exceptionally low for an extraordinary long time, against any benchmark ... negative bond yields that prevailed in some sovereign bond markets were unprecedented.

They have, according to Borio, “stretched the boundaries of the unthinkable.”

He saw the persistence of exceptionally low interest rates as reflecting the response of central banks and market participants “as they fumble in the dark in search of new certainties.”

Now the BIS fears that these low rates may not be “equilibrium ones, conducive to sustainable and balanced global expansion.”

Rather than just reflecting the current weaknesses they may in part have contributed to it by fueling financial bubbles and busts that create expensive financial imbalances and delay adjustment.

As Borio put it, “The result is too much debt, too little growth and too low interest rates. In short, low interest rates get lower rates.”

Borio titled his team’s paper “Is the unthinkable becoming routine?”

Haldane settled on “Stuck.”

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Max Walsh


Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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