We need a global fiscal push.

I’ve written many times before (at least here, here and here about the need for Australia’s government to pull the fiscal levers more to support the economy. The RBA has all but exhausted the monetary levers. Interest rates are nearing zero and risk creating an asset price bubble in the property market and/or the stock market. Even the Governor of the RBA Philip Lowe acknowledges that “it won’t generate medium term growth and just risks pushing up asset prices”. That’s why we need the government to fast-track more infrastructure investment, enact more training and skills development programs, undertake tax reforms in areas such as housing, and offer private sector investment incentives.

But it still won’t be enough.

Australia could do everything right. The government could go on the most well-targeted unprecedented spending spree in our history. Economic growth could push up over 3 per cent again. Unemployment could fall under the RBA’s 4.5 per cent target. Productivity could start accelerating. Wage growth too could once again have a three in front of it. Even inflation could return to the RBA’s 2-3 per cent target range.

But interest rates will still be too low.

Low interest rates are a global phenomenon. There are enormous amounts of savings sloshing around the global financial system looking for returns. Households and businesses are indeed borrowing it (every dollar of savings naturally represents a dollar of borrowing somewhere in the world – it has to) but it’s not productive investment. Too much of it is speculative. If it were productive, it would generate solid returns and would drive up interest rates. This isn’t happening. The private sector alone can’t find enough productive investments and governments aren’t bold enough to go on an infrastructure spree. Hence low interest rates and bubble-susceptible asset markets.

Australia can’t fight this trend alone. If global interest rates are low, ours will be too, even if our economy is running as well as possible.

This is the problem. During the good times, we want central bank interest rates to be at least 4 per cent. Before the GFC in Australia, they were 7.25 per cent! By some estimates today, good times would only deliver 2-3 per cent interest rates. The reason this is a problem is that during a downturn, it doesn’t leave the central bank much room to cut interest rates to stimulate the economy (unless they wanted to target a higher inflation rate – see my previous work here). This lack of ammunition would once again put the burden on the less efficient and less timely political process to boost the economy – something that independent central banks were supposed to largely mitigate.

This is why we need … A GLOBAL FISCAL PUSH. Trillions of dollars can be borrowed by national governments all over the world at near zero per cent interest rates. Some governments can borrow at LESS than zero. Even mortgage holders in Denmark are enjoying negative interest rates of -0.5 per cent – yes, their monthly bank statement literally includes an interest payment FROM THE BANK TO THE BORROWER! This is unprecedented and our grandchildren won’t believe it – so keep your bank statements as evidence.

I’m old enough to remember a time when it was unthinkable that we couldn’t convince governments to spend MORE and we may be seeing the tide turning. The European Central Bank is increasingly putting pressure on its national governments to spend up big. Even fiscally conservative governments like Germany and the Netherlands are reconsidering their balanced budget rules in light of the ridiculous cheapness of borrowing and the fact that the EU may already be in recession.

And there’s no shortage of projects that could be financed. In Australia, the pipeline of potential public transport projects is virtually endless. In Europe and the US, simply repairing and upgrading existing infrastructure would be a big boost. Given current interest rates, it beggars belief that governments can’t think of a worthwhile way to spend money.

This is one of the biggest moments in the global economy since the 1930s but we don’t need a world war to finish it. We just need governments to invest in their own backyards. It won’t just spur long term economic growth and bring interest rates back up to levels that would provide insurance against the next downturn. It could also show the world what happens when they work together, ushering in a new era of global cooperation that even a decade of insular nationalistic politics hasn’t yet destroyed.