Ten years after the global financial crisis, the world economy remains heavily medicated.
Interest rates are still well below their long-run averages. And the cumulative side effect of years of easy monetary policy is that global debt, as of 2016, has climbed to the equivalent of 225 per cent of global economic output, outstripping the previous peak of 213 per cent of GDP in 2009.
All the deleveraging which occurred during the Great Recession and the long slow recovery that followed has been reversed — and then some.
In the United States these days it is a case of different drug but high dosage. US interest rates are rising, but the pace of "normalisation" is being forced by extraordinarily loose fiscal policy.
The large and regressive tax cuts enacted by Congress last year, plus extra spending agreed in Budget deals cobbled together on the brink of Government shutdowns, mean the US is looking at something close to a US$1 trillion Budget deficit in the year ahead, at a time in the cycle when it should be running a surplus.
The International Monetary Fund says US fiscal policy is the most procyclical it has been since the Johnson Administration in the 1960s. Instead of moderating the business cycle, it is amplifying it.
Ben Bernanke predicts that in 2020 the US will have its Wile E. Coyote moment — when the economy falls off a cliff, like the Looney Tunes cartoon character.
SHARE THIS QUOTE:
But the price of a larger and longer boom is liable to be a deeper and longer bust. Former Federal Reserve chairman Ben Bernanke predicts that in 2020 the US will have its Wile E. Coyote moment — when the economy falls off a cliff, like the Looney Tunes cartoon character.
It might not, however, be that pillar of the status quo which gives way and sees global growth rates crumple under the weight of all that debt.
Other potential candidates include trade wars, given the rapid build-up in corporate debt — not least, but not only, in China.
Or the recent ebb tide of capital flowing out of emerging market economies, which have filled their boots with US dollar debt, and into the higher yields now available in the US could turn into a rout.
Or the policies of the new Italian Government could trigger Euro Crisis II, the sequel.
Or it could be a geopolitical shock. It is hard to see any good coming from the US decision to renege on the Iran nuclear agreement, for example.
Meanwhile, New Zealand's debt level — the sum of Government, business and household sector debt relative to the size of the economy — stood at 202 per cent of GDP in 2016, according to the IMF's global debt database.
It is lower than the global average of 225 per cent of GDP, but only because Government debt is relatively low.
Household debt, on the other hand, has climbed from 28 per cent of GDP in 1990 to 93 per cent in 2016, driving the national total from 144 per cent of GDP to 202 per cent over the same period.
Since New Zealand households habitually spend more than their incomes, and New Zealand banks source around 22 per cent of their funding abroad, that leaves us seriously exposed to what is happening to offshore interest rates and financial market sentiment more generally.
Debt-to-income ratios — both across all households and for households with mortgages — are back above their previous highs in 2009.
The Reserve Bank, in last month's Financial Stability Report, warns that households with investment properties are particularly indebted. Only 8 per cent of households own investment properties but they account for 40 per cent of housing debt.
In the circumstances, the observations of the Bank for International Settlements' (BIS) annual economic report this week are as relevant for the RBNZ as for any central bank.
When it comes to weaning economies off the level of monetary policy stimulus in place since the GFC, it says central banks have to strike a delicate balance. "On the one hand, moving too slowly could give rise to overheating and financial stability risks. On the other hand, moving too fast could trigger disruptive market reactions and harm the economic recovery, not least as global debt levels relative to GDP have continued to increase and financial market valuations appear stretched."
Their task is further complicated by uncertainty about where the equilibrium interest rate now sits — that is, the rate consistent with output running at potential while inflation is at target.
Higher levels of household and business debt should make the economy more sensitive to any given change in interest rates, but how much more sensitive?
The BIS also worries about the fact that central banks and governments will have a lot less room to manoeuvre when the next crisis strikes.
When the GFC hit, the Reserve Bank's official cash rate was 8.25 per cent and governor Alan Bollard was able to cut by 575 basis points. Adrian Orr inherits an OCR of 1.75 per cent — far fewer bullets in his bandolier.
But the case for raising interest rates to replenish the central bank's ammunition is weaker in New Zealand than elsewhere, given how much "policy space" fiscal policy has.
When National took office during the crisis it inherited a net Government debt-to-GDP level of just 5 per cent. It is higher now at 21 per cent of GDP but that is still notably low by international standards.
The BIS warns that moving too early and too rapidly to raise interest rates is also risky: "The upswing may prove fragile, given the uncertainty over how financial markets and the economy might respond after the long period of ultra-low rates."
Another consideration that would support a very patient strategy, it says, is that by testing how far the expansion can be accommodated, central banks might partly reverse some of the crisis-induced loss in production potential. "This could entice discouraged workers back into the labour force and boost investment and productivity."
In New Zealand's case the untapped labour market slack includes not only the discouraged — the 99,000 who say they want a job but are not seeking one — and the 127,000 officially unemployed, but also the 112,000 part-time workers who say they want to and could work longer hours.
All in all, the Reserve Bank's decision to keep monetary policy on hold looks like the right call.