World Economy

Global Trouble Here to Stay

Global Trouble Here to StayGlobal Trouble Here to Stay

Have central banks lost control of the world’s economies? The Bank of Japan recently took official interest rates negative. It joined the European Central Bank and the central banks of Sweden, Denmark and Switzerland in effectively charging depositors for holding their cash. They are the latest efforts to kickstart economies that are persistently underperforming.

It’s not just the swathe of negative interest rates that points to an enormous problem. By the end of last year about one-third of debt issued in the eurozone countries had negative yields, Yahoo News reported.

On top of that are the other major central banks with interest rates close to zero or at record lows.

The Bank of England first set interest rates in that country at 6% in 1694. The record low was 0.5% set in March 2009. That’s where they still stand.

Across the Atlantic, the Federal Reserve took official rates up by a quarter percentage point in December, after holding them at zero-0.25% for seven years. Expectations that rates in the US would climb this year have been jettisoned.

Earlier this month Fed chairwoman Janet Yellen was asked about the prospects of negative interest rates to kickstart the economy.

In Australia, the reserve bank has held official rates at an equal 64-year low of 2% since May, with futures markets punting they will be cut some time this year.

Across the globe, official interest rates have never been at such low levels. And yet the global economy continues to struggle. Almost every year since the advent of the global financial crisis in 2008 the International Monetary Fund has talked up the prospects of economic growth. And through every year the IMF has had to cut its growth forecasts (and will cut its forecast for this year in coming weeks).

The Australian economy grew 4.3% in the 12 months to the end of March 2012. It was a 12-month window of economic sunshine, driven by a huge ramp-up in mining construction, and it has not been close to that point since.

Low interest rates have delivered something else. Share markets have jumped in certain countries, while, in Australia, it was a run-up in housing and house prices (mostly in Sydney, Melbourne and parts of Brisbane). But in terms of broad-based growth ... zip.

Opponents of ultra-low interest rates who argued that a breakout of inflation was just a few minutes away have had it even tougher.

These inflation hawks, particularly in the United States, have been jumping at inflation shadows since 2009. All for nought.

The absence of inflation has been one of the problems for governments trying to clear the debts they have incurred because of falling tax receipts.

In Australia, the financial sector-induced recession (or near depression given what occurred in late 2008 and early 2009) is different from a “normal” recession.

Economic downturns that start in the financial area run on and on and on.