The central prop of the global economic recovery is under immense pressure. If it topples, interest rates may come down faster than anyone is expecting. Henceforth, the economy can cope with sharply higher borrowing costs. We are never going back to zero rates and negative bond yields, or so goes the thinking. If so, this has vast implications for global borrowing costs and the market value of $US140 trillion ($215 trillion) of outstanding bonds. It is the burning question in world finance today. The IMF predicts US deficits of 7 per cent as far as the eye can see, pushing public debt to 137 per cent of GDP by 2028 if nothing is done. Credit: Michael Nagle/Bloomberg But not everybody thinks they are right, least of all Wicksellians. A recent article in the journal Central Banking argues that this flies in the face of both orthodox monetary theory and what is actually happening to global credit. Philip Turner, a former top official at the Bank for International Settlements, and Marina Misev from the University of Basel, warn that central banks are being misled by false assumptions about R* into dangerous overtightening, risking a global credit crunch and an asset crash. They argue that the natural rate is determined by whether private credit aggregates – bank loans and debt securities – are rising or falling. They have been falling at alarming rates across the West. Bernard Connolly, author of You Always Hurt the One You Love: Central Banks and the Murder of Capitalism, predicts that the neutral rate will plummet as soon as fiscal worries force countries to tackle their budget deficits, a process already underway in Europe. “I do not think that real long rates at their present levels are sustainable,” he said. The average deficit was stable near 2.4 per cent of GDP in the advanced economies before COVID It is 5.2 per cent this year, according to IMF data, but is starting to fall rapidly. The US is an egregious exception with a deficit near 8 per cent on a quarterly basis. “It should be in balance at this stage of the cycle. It doesn’t get better than this,” said Moritz Kraemer, former head of sovereign ratings at… Ambrose Evans-Pritchard