We should debate excessive policy easing and the neglect of credit and debt developments
Concern about sluggish growth and poor productivity is now high on the political agenda across the developed world. Yet the debates around the UK Budget and the US presidential election have failed to touch on one of the most important factors behind this trend, namely a monetary policy over-focused on near-term inflation targets and too little concerned with developments in credit and debt markets. The widespread adoption of 2 per cent inflation targets has been, at best, a mixed blessing.
What we know for sure is that ultra-low interest rates after the 2007-09 financial crisis were morally hazardous, encouraging a huge increase in borrowing. According to the Institute of International Finance, global debt rose from 280 per cent as a percentage of GDP in 2008 to nearly 360 per cent in 2021. The IIF notes that this rise coincided with diminishing productivity growth and declining potential GDP across major economies.
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