Why the central banks have kept rates so low (enabling bubbles in asset prices)

There are critics of the central banks who say interest rates have been overly depressed.

Those low rates have enabled bubbles in the prices of real estate, stocks, and bonds. Those bubbles have exacerbated the crisis of income/wealth inequality. Artificially low rates encourage speculation and distort decision-making re: resource allocations throughout the economy.

So the critics say the central banks have been implementing mistaken policies. What they don’t understand is that the banks and financial authorities have been primarily fighting deflationary forces for the last several decades.

The revolution in facility re: transportation and communication during the 19th and 20th centuries led to the extreme globalization of the economy after about 1975. Once it was a globalized labor force, companies in the relatively high-wage First World had access to huge pools of cheap labor (in China, India, Thailand, Vietnam, Mexico, etc.). This generated deflationary forces in the worldwide economy. And it’s why First World real (inflation-adjusted) wages have been stagnant for the last five decades.

There has been the specter of a deflationary spiral. There was a specific, tangible scare about that in Japan during the 1990s. So, since the crash of 1987 and then the Japanese deflation, the central banks have increasingly gone to ever-greater extremes with low interest rates and stimulative monetary policies.

Ideally they would want price stability, but, dreading deflation, their objective has been to foster a mild inflation. Those policies and that fostering are now threatening to get out of hand. We’ve lately seen signs of significant (more than 2%) inflation. If economic growth was strong the central banks could readily shift away from monetary stimulation, toward normalizing rates (which historically have averaged around 4%). But economic growth is not very strong and the banks may soon find themselves in a stagflationary bind: too much inflation if they keep rates low, too much recession if they increase rates to fight inflation.