These days the Government can borrow at interest rates about half what they were before the global financial crisis - when the Crown accounts were in a lot better shape.

It may be some consolation to taxpayers who have to service a growing pile of public debt.

But that is the silver lining to a pretty dark and ominous cloud.

The fact that the Debt Management Office could last week borrow 11-year money at a record low of 3.4 per cent is not telling us anything much about New Zealand, except that the markets still regard the Government as a good credit risk despite the parlous state of the country's external accounts.


Rather it is driven by the remarkably low yields prevailing for global benchmarks.

The United States Government can borrow for 10 years at 1.4 or 1.5 per cent. That is likely to be a negative real return, though not as sharply negative as short-term rates.

That is despite the fact that the US is running a large fiscal deficit, has gross general government debt over 100 per cent of GDP, and has had its credit rating downgraded after a period of political brinkmanship during which it flirted with default.

It is a sobering commentary on the prevailing level of risk aversion and how investors see the prospects of global growth.

"It's not sustainable," says Bank of New Zealand chief economist Tony Alexander. "But there is no way of knowing when we will see those interest rates pop up towards long-term averages, because one simply does not see a clear way out yet of the global debt problems."

With a bleak growth outlook investors are content with the prospect of a return of capital, albeit with some wear and tear in terms of its purchasing power, rather than a return on capital.

"Low interest rates reflect the fact that the world is again approaching the point where, if things are mishandled, you could have another Great Depression," Alexander says.

"Because this time [unlike the crisis four years ago] central banks don't have high interest rates they can slash. They have proven printing money doesn't work. And Governments no longer have fiscal policy buffers."


Not that he is predicting another Great Depression.

It is just that we are back at the precipice, but this time with a badly frayed rope.

In this environment, Alexander says, businesses need to focus their plans not on growth but on resilience to shocks.

Another dark view is that of Bill Gross, managing director of PIMCO, a California-based fund manager with US$1.8 trillion ($2.36 trillion) entrusted to it and a particular focus on debt markets.

Although the markets are obsessed with the woes of the eurozone it is "just a localised tumour", he says.

"The developing credit cancer may be metastasised and the global monetary system fatally flawed by increasingly risky and unacceptably low yields, produced by the debt crisis and policy responses to it."

Policy responses since 2008 have managed to prevent substantial write-downs of the $200 trillion or so of financial assets which make up the global monetary system, Gross says.

But in the process they have increased the risk and lowered the return of sovereign securities which make up the core of the system.

Low-cost funding to sovereigns is increasingly the result of money-printing central bank interventions rather than the judgment of clear-eyed private investors like him.

Gross sees in the resulting breakdown of traditional relationships between risk and return a threat to the global monetary system which has prevailed since the breakdown of the Bretton Woods system 40 years ago.

That severed the last remaining link between money and gold, replacing it with fiat money underpinned by confidence that major central banks would "print money parsimoniously and target inflation close to 2 per cent".

"Now with dollar reserves widely dispersed in China, Japan, Brazil and other surplus nations, it is likely there will come a point where 2 per cent negative real interest rates fail to compensate for the advantages heretofore gained in buying sovereign bonds," Gross says.

As they question the value of many existing financial assets, those with money to lend are moving it marginally elsewhere, he says, to real assets such as land, gold and other tangible things or to cash under a figurative mattress where at least it is readily accessible.

Alexander for his part does not see much danger of inflation from central banks' printing money "because people aren't willing to spend it". "And if that does start to appear the central banks can fairly rapidly drag the money out of the system again."

But he also sees a "fairly fraught" global financial environment ahead for many years.

"Between 1992 and 2007 was a period of extremely good economic growth in most economies based on excessively loose credit conditions.

"Now one needs to have at least that same time frame in mind for the eradication of the after-effects of those loose credit conditions."

The Treasury is running the line that credit conditions could get looser yet if last month's Budget turns out to be too contractionary.

In a commentary attached to its monthly summary of the data flow, it contends that the international debate about growth versus austerity does not apply to New Zealand.

We can have both.

It forecasts the planned return to a balanced Budget will reduce demand growth by four percentage points over the next four years.

But the Treasury argues that will not hold back economic growth because it will allow the Reserve Bank to keep interest rates lower for longer.

"As long as monetary policy is not hitting the zero lower bound for interest rates, a well signalled and credible fiscal consolidation path should, all else equal, be offset by lower-than-otherwise interest rates, and associated exchange rate depreciation, which should boost net exports."

So we do not face the same dilemma as countries which are up against the zero bound, such as the United States, Britain or Japan, or which have no independent monetary policy of their own, like the members of the eurozone, the Treasury assures us.

Only if the economy were hit by another major shock like the GFC, and the central bank had to dispense the remaining monetary morphine it has in its cabinet, would there be a case for re-examining the pace of fiscal tightening.

That is the orthodox story, but it is glib. One of the clearest lessons of the past 10 years is that there are limits to the potency of monetary policy in a small open economy like New Zealand.

During the housing-led, debt-fuelled consumption boom of the past decade the central bank tightened and tightened to little effect, as banks ignored the official cash rate and slurped up cheap money offshore to service eager borrowers here.

It took an eye-watering official cash rate of 8.25 per cent to get on top of that.

Since then we have seen the OCR slashed by 575 basis points and the lowest floating mortgage rates since 1965.

Yet credit growth has been almost imperceptible and the economy grew just 1.1 per cent last year.

With such a powerful deleveraging rip running, to just assume the Reserve Bank has plenty of stimulus up its sleeve seems a bit too easy.