Louis Cullen is Professor Emeritus of Modern Irish History at Trinity College, Dublin. Broadly speaking, by historical standards interest rates have been too low and for too long. If American borrowing and Chinese surplus were both smaller (the latter by devoting more resources to raising low incomes at home) the world would have been a safer place in banking terms. If higher rates return—as they will—they will make the world safer for banking but will increase the costs of servicing Irish foreign loans. Though the Irish outlook is gloomy, the lessons of history are that faltering economies can be turned around with a surprising degree of speed. This was the case for Sweden and Finland in the early 1990s, and for Ireland in the transition from the lost 1980s to the Celtic Tiger years (and in the late 1950s too). In the early 1990s, in a world whose prospects were looking up, recovery was relatively rapid. Now, however, the economic outlook is at best uncertain; industrial countries could face the sort of stagnation that Japan experienced in the 1990s and 2000s. Even more disturbingly, a fear of competitive devaluations (to cheapen the price of exports to foreign purchasers) is on the horizon. HI

On the world canvas in recent decades the central feature has been the huge American deficit and the large Chinese surplus largely invested in US government stocks. Imbalances of themselves have a long history, though until the US–Japan nexus of the 1980s and 1990s they were smaller and less global. The first global one, or at least the first imbalance not centred on London, occurred in the 1920s, when the US was a major lender and Germany a major borrower: this interdependence also explains why contagion, economic and financial alike, spread so rapidly across the world after 1929. It requires an effort now to realise how in economic textbooks into the early 1960s the ‘dollar gap’ (persistent excess of exports over imports) was seen as a fact of economic life, and an unchangeable one. It was not, of course. The Vietnam War soon saw to that, and one of the first people to spot the danger of the euro-dollar (dollar accounts for purchases in Europe) was General de Gaulle. In recent times US foreign indebtedness, magnified by a policy of low domestic taxation, left American consumers free to spend on consumer imports, thus contributing to the easy money world-wide of recent years. But a more insidious result was that easy money made bankers’ returns on orthodox investments low and encouraged the creation of more risky investment vehicles. The most disastrous manifestation of that was in the US: high-interest sub-prime mortgages were made marketable by their securitisation for sale to wholesale investors.