Why low rates don't mean borrow more

Posted by: Paul Donovan

03 May 2019
  • There are two things to note about global growth in the years after the financial crisis. Growth has slowed from the 2000–2007 period; it is normal compared to other periods. But what is most dramatic is that growth has been extremely stable. In fact the last seven years are perhaps the most stable growth ever.
  • Very stable growth kept interest rates very stable. Stable inflation also kept rates stable.
  • This has given a false sense of security. Perhaps governments could borrow a lot more without changing interest rates or inflation? Higher government debt levels are not a big threat to economic stability at the moment. Low rates mean debt is low-cost.
  • Using low rates as an excuse to raise government spending is high-risk. Random fiscal boosts may disrupt the remarkably steady growth the world has enjoyed. An economic boom would be followed by an economic bust. The uncertainty of returning to a boom-bust cycle could increase interest rates in the long term, increasing the cost of debt.
  • Of course, there are merits to building better roads. Redistributing economic growth can also be good. But to argue low rates should mean more government debt misses the point; being boring helped create low rates.

Explore more CIO Daily Updates