SUPPOSE WE THEN learned that the yield on 10-year government bonds was
just 2.6 per cent in the US, 2.4 per cent in the UK, 1 per cent in
Germany and 0.6 per cent in Japan. One would have to forget the notion
of high inflation; we would suggest instead that these economies had
been allowed to fall into a deep, prolonged depression. If we were told
that central banks had also implemented huge expansions of their balance
sheets, confidence in this hypothesis would strengthen. Why else would
policy makers have been so unorthodox?
Up to a point, we would also have been right. In the US, UK and the
eurozone, output has fallen far below what virtually everybody expected
eight years ago. The same is true of Japan, though the trend in question
ended two and a half decades ago.
Yet, contrary to what we might also have expected, we do not observe
accelerating deflation: the latest data on annual consumer price
inflation are 1.7 per cent in the US, 1.5 per cent in the UK and 0.3 per
cent in the eurozone. None of these figures, even the last, are all that
distant from announced targets.
When we look at the high-income economies in this way, we must recognise
that they are in a truly extraordinary state. The best way to describe
it is as a managed depression: aggressive monetary policies have been
sufficient to halt accelerating deflation, but they have been
insufficient to produce a strong expansion...