The industrialised world is generally hampered with structurally high debt and weak growth. Policymakers and central banks push these problems onto the back burner. Zero interest rates and a glut of cash create an artificial world that props up inefficient political and economic structures. The longer the problems remain unsolved and the dependence on cheap money persists, the greater the risk of uncontrollable consequences. We call this scenario of the world under a bell jar “Muddling along”.
In recent years, the leading central banks have lowered key rates to near or even below zero. However, the resulting flood of liquidity has not improved conditions in the industrialised economies. Since there is virtually no room to trim rates further, the central banks are opting for unconventional measures, such as securities purchasing programmes. Yet these measures have failed to reduce government debt or stimulate economic growth – problems are simply postponed into the future.
So far there have been few signs of real reform, particularly in the key areas of government debt and market liberalisation. Innumerable rescue packages for crisis-stricken countries do little more than buy time for policymakers. Meanwhile, inefficient economic structures are propped up artificially.
Despite untiring interventions by the central banks and increasingly large rescue packages designed by politicians, economic growth is stagnant. The cheap money is not working through to the real economy, nor stimulating growth. The industrialised economies are still expanding well below their potential.
Most of the industrialised world is overindebted because governments continue to delay overhauling state budgets. The official (explicit) debt figures only tell half the story. If implicit debt, such as pledges made by governments to their pension and healthcare systems, were also to be included, the picture would be even more bleak. From this angle, the USA is even more heavily indebted than Greece.
Life expectancy is longer than ever. While that is a good thing, it also represents a burden on pension systems. There are increasingly fewer active workers per pensioner, especially in developed countries. Unless the pension system is restructured, pensioners will continue to live off the younger generations. The “contract between generations”, which plays a key role in long-term social harmony, appears to be threatened.
The monetary policy stimulus measures create an artificial world and distort prices. Early side effects of the cheap money policy are already evident today. Low interest rates, which make mortgages more accessible, are spurring demand for real estate in some cities and metropolitan areas in strong economies such as Germany – and as demand rises, so do prices. There is a danger of collateral damage such as bubbles.
Ultra-low central bank interest rates provide cheap refinancing for countries and companies. Zero interest rates are less interesting for savers and individuals who need safe, short-term investment vehicles. They are no longer adequately compensated for risk. The result is a dearth of decent investment opportunities in the fixed-income segment. While the streams of cheap money from the major central banks naturally shore up the stock markets, these are still fairly valued – or at least not sharply overvalued, in historical comparison.