This all suggests that investors may be attaching some probability to very bad outcomes, possibly the tail risk of economies becoming stranded in a debt trap. This market view is mirrored in elevated corporate caution. Investment remains subdued and businesses continue to build cash in many advanced economies. 6 This is one reason why the so-called “equilibrium” real interest rate is negative in many advanced economies, though it has risen and is possibly now positive in others like the UK. 7 Reflecting these real dynamics, central bank interest rates have had to be set at extraordinarily low levels and supplemented by large scale asset purchases simply for monetary policy to remain neutral. 8 Escaping a debt trap requires a suite of measures including structural reforms to boost productivity. But above all an economy needs to be able to channel all available savings – household, corporate and foreign – to those sectors willing and able to spend. In many respects, recent progress in the UK shows how. 3. How the UK is escaping its debt trap  In recent years, the UK economy has shown increasing signs of normalisation. Non-financial private debt has fallen by around 30% of GDP since its peak, the economy has grown consistently above trend, and unemployment has fallen from a peak of 8.5% to less than 6% today. This performance underscores several structural features necessary to escape a debt trap. The first is an integrated financial system which channels savings from one part of the economy to investment in others.
Since the near collapse of the UK banking system, bold steps have since been taken to shore up its resilience. £ billion of new bank capital has  4  Term premia, which measure investors’ compensation for holding long- rather than short-maturity claims, are also estimated to have declined since last summer, perhaps reflecting growing expectations for central bank asset purchases. 5  For the UK, December 2008; and for the euro area, June 2012. 6  The non-financial corporate sector was a net saver in Germany, Ireland, Spain, Greece and the UK at end 2013, based on Eurostat data (ESA 95 basis). 7  The “equilibrium” rate of interest is that which equates demand with potential output, thereby delivering inflation at target in the absence of “cost-push” shocks. 8  As my colleague Ben Broadbent recently said, central banks aren’t the cause of low interest rates, but rather are actors reading a script written by others, Broadbent, B (2014), “Monetary policy, asset prices, and distribution”, speech at the Society of Business Economists Annual Conference. BIS central bankers’ speeches  3  been raised in recent years, and banks’ performance in the recent UK stress test suggest growing confidence in the resilience of the system is merited. 9 Second, the UK’s fiscal policy framework helps insure against severe systemic shocks. The UK had the space to allow its automatic stabilisers to cushion the impact of the recession.