The End of Free Money: How a Decade of Zero Interest Rates Warped Global Markets

The peculiar thing about the period of almost zero interest rates is how fast it started to feel normal. By the middle of the 2010s, borrowing money was so inexpensive that discussing the cost of debt had all but disappeared. Bond yields drifted toward zero as traders in glass towers in Frankfurt, New York, and London watched governments borrow enormous sums of money with hardly any market movement. It’s difficult to ignore how unusual that particular moment was.

The policy started out as a reaction to an emergency. Central banks lowered interest rates to levels that would have seemed unattainable ten years prior to the financial system’s near collapse in 2008. The objectives were fairly straightforward: maintain credit availability, prevent bank failures, and keep unemployment from getting out of hand. During those early years, there was a subtle feeling of relief mixed with incredulity as one strolled through financial districts. The system was still in place. Just barely. However, the cheap money persisted after the crisis subsided.

Central banks found that the economy had grown oddly reliant on it. Maintaining low rates promoted mortgage borrowing, supported stock markets, and made it possible for governments to finance massive deficits without suffering immediate consequences. Investors appeared to think that central banks would always be there, cutting interest rates whenever problems arose. This presumption gradually altered market behavior.

Businesses borrowed heavily, issuing inexpensive bonds to repurchase their own stock. Speculative startups received a flood of venture capital. In cities all over the world, housing costs have increased. Even governments that had previously been cautious about large deficits began acting as though the previous restrictions were no longer in place. Politics seems to have changed as well.

Strategist James Carville famously made a joke in the 1990s about wanting to reincarnate as the bond market because it could scare everyone. At the time, rising bond yields could force governments to cut spending or reduce deficits. Politicians were aware of the danger. That pressure nearly vanished during the era of near-zero rates.

Fiscal restraint seemed archaic as borrowing became so inexpensive. In policy circles, a new economic theory started to gain traction. According to modern monetary theory, nations that issue their own currencies may have much bigger deficits than previously thought. The idea was embraced by some economists. Others silently worriedly observed.

During those years, one could feel the change as they strolled through the halls of European institutions in Brussels. Once-fearful nations started to assume that central banks would always step in. The markets nearly immediately stabilized after Mario Draghi pledged to do “whatever it takes” to save the euro. The demand for challenging reforms subsided.

Changes to pensions were delayed in Italy. Europe’s financial integration came to a standstill. Structural issues continued to go unsolved. Patience had been superfluous due to cheap money.

When the pandemic struck, the response proceeded even more quickly. Within weeks, governments and central banks unleashed massive stimulus. The speed was nearly startling when compared to previous crises. It took years for decision-makers to alter course during the Great Depression. The change took more than a year in 2008. It occurred in less than a month in 2020.

The markets swiftly recovered. Stocks rose once more. The rescue was applauded by investors. However, there was more going on underneath the surface.

In all of the major economies, debt levels reached all-time highs. China, the United States, Britain, France, and Italy all significantly increased their borrowing. It appeared that the system would remain stable as long as cheap money persisted. That assumption might have always been brittle.

Eventually, inflation reappeared, first subtly and then more forcefully. Suddenly, central banks had to make a tough choice. Maintaining stimulation ran the risk of undermining currency confidence. The vulnerabilities created during the protracted period of easy money were in danger of being exposed by tightening policy. Observing the adjustment has been uncomfortable.

Bond yields are increasing once more, serving as a reminder to governments that markets continue to set boundaries. The sharpness of currency fluctuations is increasing. Investors are realizing that low-cost capital is no longer a given. It’s possible that the psychological change is as significant as the financial one. There’s also a lingering question about what the last decade actually achieved.

Clearly, some investments increased productivity. Technology firms grew quickly. Infrastructure initiatives advanced. However, a significant amount of the borrowed funds were merely used to fund political pledges, increased asset values, or consumption, all of which were simple to make during a period of almost unrestricted borrowing.

It seems as though the world economy is gradually rediscovering an earlier reality when observing the markets today.

Once more, money has a cost. Debt has repercussions. Additionally, policymakers who became accustomed to the era of effortless stimulus are now navigating a world where budgetary constraints are once again important. It might take years to readjust. Maybe longer.

However, the period of free money, or something very similar to it, now seems less like an enduring aspect of contemporary economics and more like an odd historical period that passed long enough for everyone to forget how peculiar it truly was.