Below is very good video from the FT – here are the main points:
- Central Banks – by lowering interest rates they could make savings less attractive and spending more attractive
- After GFC low interest rate and asset purchases increased lending and avoided a global depression.
- Now the world economy is not behaving as the central bankers’ said it would
- Their theory was that with lose credit (lower interest rates) the economy would grow and inflation would rise.
- Inflation is stagnant (unlike the 1960’s – see graph below) and this is worrying as a little inflation is required to lubricate the economy. It allows prices to fall in real terms.
- The missing inflation may mean that the bankers’ theories are wrong.
- Cheap money may have encouraged high asset prices and debt levels but it may undermine the economy without doing much for growth.