They cannot go any lower. The United States Federal Reserve has reduced its funds rate to between 0 and 0.25 per cent in a desperate effort to stimulate economic activity in America. The Bank of England might well follow. These are unprecedented actions from our monetary authorities. But these are also unprecedented times.
A screeching global economic slowdown has coincided with a global banking crisis. Traumatised investors all around the world are pulling their money out of assets, shares and banks and ploughing it into government securities.
The result is that money is being sucked out of the international economy at a quite stunning rate. Businesses are being forced to sack workers as over-indebted households in the West cut back on spending. Developing countries and strong manufacturing nations are in just as much danger. They have built their economies around strong export sectors. As overseas demand dries up, so does their livelihood.
Yet nothing the authorities are throwing at the problem seems to be having much effect. The bank recapitalisations stopped these institutions going under, but it is not inducing them to lend on anything like a healthy scale. The effect of interest rate cuts has, so far, been underwhelming. Attempts at fiscal stimulus in Europe, China and Japan look unlikely to be substantial enough to restore confidence. There cannot even be any guarantee that Barack Obama's expected huge spending package in America in the New Year will do the trick.
The world is in a dangerous place. Deflation and negative growth will create immense social strains. An upsurge in national protectionism cannot be ruled out. Evocations of the 1930s are by no means fanciful.
In the immediate term it is vital that governments think radically and act in co-ordination with each other. If further recapitalisations of the banks are necessary it is better to do it sooner rather than later. Perhaps governments should set up "bad" state-controlled banks to get the toxic debt off the sector's balance sheets; anything to get credit flowing again. These issues are especially pressing here in Britain.
Monetary authorities, including the Bank of England, also need to print money and use it to buy assets in order to prop up prices. This flies in the face of the financial orthodoxy of recent years, but these are not normal times. The immediate threat of debt deflation is a much greater danger than the threat of inflation.
Yet the old fundamentals do apply in one vital respect. The monetary authorities must have a credible plan to soak up the liquidity they have pumped into the system. Otherwise a massive surge of inflationary expectations could easily smother the hoped-for recovery. In the longer term, our political and monetary leaders must recognise the need for a fundamental rebalancing of the global economy. Debtor nations such as the US and Britain cannot continue floating their economies on a sea of credit. Countries such as China, Germany and Japan need to reduce their overwhelming reliance on exports and stimulate their domestic consumer sectors. Otherwise the conditions that caused this crisis will continue to exist.
The great crash of 2008 was a consequence of an unprecedented financial bubble and gaping global economic imbalances. The objective of 2009 will be to halt a lethal deflationary spiral. But after that, the hardest task of all awaits: putting the world on a pathway to sustainable growth.