Among the EMEs, this period of low global interest rates has seen strong growth of credit in many economies, and while this has supported consumption and domestic demand, it has also led to increased household, corporate, and government indebtedness. The world today is even more indebted then it was before the crisis. I am sure that some of that debt went into productive uses, but it also the case that when something is cheap, it is used wastefully. It should also be obvious after the crisis, that economic growth fuelled by high credit growth is  BIS central bankers’ speeches  3  essentially growth borrowed from the future; higher growth today will be at the cost of lower growth tomorrow. Lastly, risks can also emerge from the current account of the balance of payments. It is important to understand that changes in the current account can be both the source, as well as an outcome, of changes in capital account. The traditional interpretation is that a country has a saving-investment gap that is reflected in its current account deficit, which then drives it to rely on foreign savings to fund that deficit. But, it is equally possible that countries can have large capital inflows resulting in excess domestic liquidity and low interest rates. Add to that an appreciating exchange rate, and you have the key ingredients for domestic consumption and investment booms, leading to higher imports and driving the current account into a deficit or a lower surplus.
One way of answering this question is to look at the macro picture and determine the trend rate of GDP growth that would be commensurate with such a strong increase in corporate earnings. This is also pertinent in the context of the current discussion about a “new economy” that is perceived as being capable of higher productivity growth and thereby an upward shift in potential GDP growth. A simple growth model shows that in order to justify a P/E ratio between 30 and 35, the growth trend for total factor productivity would have to move up almost 3 percentage points.4 That in turn implies 4  The feasibility of a higher future increase in corporate earnings can be analysed with a simple model where GDP growth is determined by the inputs of capital and labour together with the efficiency with which these resources are utilised in production. Using a simple Cobb-Douglas function, the rate of increase in the return to capital can be derived as gR=gA+(1-a)(gL-gK), where gA, gL and gK are the growth rates for total factor productivity, labour and capital, respectively. The relevant factor in the present context is the return to capital (the flow of income to owners of the capital stock in relation to the value of the stock) because this should be linked to the growth of corporate earnings.