With China now a member of the WTO, the global labour force expanded considerably. Low wages and cheap goods from China exerted downward pressure on goods prices. As China’s substantial savings surplus continued to grow, large amounts of savings were exported to the West. Inflation slowed in the decade following the turn of the millennium, in spite of high growth and falling unemployment. Combined with China’s savings surplus, this resulted in persistently low interest rates. Low interest rates coincided with weaker regulation of the banking and financial sectors, particularly in the US, but also in Europe. That proved to be a dangerous cocktail. Banks took more risk and levels of equity capital were too low. Household debt rose substantially. In many European countries, government debt ballooned in the shadow of low interest rates. When the crisis erupted in 2008, many were ill-prepared. 1  Chap. 8 and 9 in Lie, Einar and Christian Venneslan (2010), Over Evne: Finansdepartementet 1965 – 1992, Pax, Oslo (Norwegian only). 2  The expression “counterstructural policy” was used by Hermod Skånland in autumn 1977 when he wrote “The countercyclical policy conducted in Norway has to some extent also become a counterstructural policy”. Skånland (1977): “Konjunkturperspektiver og norsk næringsliv” in Sosialøkonomen 10/1977, p.10 (Norwegian only). 2  BIS central bankers’ speeches  Two aftershocks – China and Europe The global economy is still struggling with the repercussions of the crisis, with record-low interest rates and overcapacity. Growth is low.
Crises can and should be curbed, using measures to strengthen the economy’s immune system as well as measures that reduce the impact once the crisis has erupted. This means that government intervention using public funds may be the right approach in a situation of decline and deflation, low interest rates, high unemployment and pessimism. But crisis-related measures must also be focused on the deeper causes of the crisis in order to strengthen economic sustainability over time. Countercyclical policy must not become counterstructural policy. Crises are not necessarily just an evil. A crisis can lead to reforms and measures that foster progress, as it did in Norway in the 1990s. The regulation of the banking sector in the wake of the global financial crisis is another example. Experiences such as these may give us some comfort in the bleakest of times. The world will go on, even after a deep crisis. Thank you for your attention. BIS central bankers’ speeches  7