Credibility is an elusive ideal; difficult to attain and deceptively easy to squander.

Janet Yellen, the head of the world's biggest central bank, the US Federal Reserve, last week shredded what remained of hers and the organisation she chairs.

Once again, she hesitated when decisiveness was required. Once again, she capitulated to fear. Rather than face the wrath of financial markets she instead chose to bow down before them. In so doing, she has made a looming problem even worse.

She is not alone. The Bank of Japan, having promised a wide ranging review of its radical monetary policy — including negative interest rates and money printing on an industrial scale — squibbed last week when it announced a couple of minor tweaks.

Most of the world's economic leaders now find themselves in a similar situation, stranded at the crossroads, agonising over which way to turn, paralysed by fear, even as it becomes ever more obvious that their radical policies have failed.

It is not for a lack of warning. On Thursday, The United Nations Conference on Trade and Development (UNCTAD) issued a deeply worrying review of the state of the global economy.

The failed monetary policies have done nothing but flood the world with unsustainable debt that could be the catalyst for another global recession, it warned.

The case for a total rethink of economic management has become more urgent as the evidence mounts that our reliance on monetary policy along with a deregulated financial system has gone too far.

That means just one thing; a partial return to Keynesian thinking, of Government-led investment, an idea that has been demonised for decades.

Newly minted Reserve Bank boss Phil Lowe on his first outing last week endorsed this very idea.

Just four days into the job, he openly criticised his central banking contemporaries at a Parliamentary hearing, ramping up the rhetoric from his predecessor Glenn Stevens that central banks could no longer be expected to do all the heavy lifting.

Monetary policy, Mr Lowe said, was "not worked as effectively as it might have".

"One response is to keep doing more of it in the hope that it finally works," he said. "My judgement is that this has not been particularly useful."

In the rarefied world of central banking, it was a rare moment of truth and self-evaluation.

Then, he went one step further.

"Another option is for some entity in the economy to use the low interest rates to increase its spending. The Government could either use its balance sheet or its planning capacity to do infrastructure spending."

Politicians should abandon three-word slogans

A Monetarist, at the very top of his profession, urging Keynesian action. Who would have thought.

There is just one problem. For the past 40 years, our politicians have mercilessly beaten us senseless with the idea that debt is evil and that surpluses equal economic salvation.

How on earth could any politician retain any sense of dignity by doing an about face on that one?

It is economic nonsense, of course. Protracted surpluses can be every bit as debilitating as a structural deficit primarily because constant austerity restrains economic growth.

But there is another way. If only they could abandon the inane three-word slogan — like "Debt Deficit Disaster" — or the infantile two-word mantra — "Jobs and Growth" — and opt for a slightly more sophisticated, even intelligent strategy.

There are two forms of debt; the kind we are racking up now because we are not earning enough revenue to pay for the services we demand. That is bad debt.

Then there is debt that can be used for investment. Borrowing at 3 per cent to invest in projects that deliver a much greater return is good debt. It is what every major corporation does.

Companies that do not borrow to invest usually are deemed to have a "lazy balance sheet" and quickly become takeover targets. So there is some irony that big business and their lobby groups are among the harshest critics of Government debt.

A 'broken formula'

It could well be that we need to have two sets of accounts in the budget papers; one for recurrent spending and another for investment.

Improving infrastructure, as the RBA governor contends, boosts employment in the short term and has the added longer term benefit of lifting productivity which is vital for maintaining economic growth.

For almost 40 years, we have been conditioned by the ethos that Government should steer clear of the economy, that private enterprise, competition and free markets are best equipped to handle every commercial activity.

But markets can and do fail, a fact that even former Fed chairman Alan Greenspan was forced to concede in 2008.

"I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms," he told a Congressional hearing in Washington.

More importantly, Mr Greenspan argued that the unfettered free market philosophy that he championed for 40 years was fundamentally flawed.

Mr Greenspan's admissions, delivered in the darkest days of the crisis when it appeared the global financial system could collapse, have been largely forgotten.

The debt crisis of eight years ago was the product of a US Federal Reserve policy of ultra-low interest rates, poorly regulated banking systems and the development of a global system of high speed capital transfers.

Rather than rethink the balance between monetary and fiscal policy between central banks and Governments, the response has been to continue with the broken formula.

The US kicked it off with a huge round of money printing, quaintly dubbed Quantitative Easing. Europe, the UK and Japan followed suit.

In Europe, and particularly Greece, Spain and Portugal, governments imposed harsh austerity measures while the European Central Bank opened the monetary floodgates.

Interest rates were cut to zero even as it became obvious that the cuts were having little impact. Then, for the first time in the history of mankind, they were cut to below zero.

'Alarm bells have been ringing'

The result? Global growth is slowing. Deflation has become the overarching concern from regulators. And most worrying of all, debt has risen to astronomic proportions.

Developed world central banks now have debts approaching $US20 trillion, almost 40 per cent of GDP.

And an unwelcome side-effect of all that money printing was that a large part of the cash found its way to developing nations as banks and investors sought out returns higher than zero.

According to the UNCTAD study released last week, developing world corporate debt could be the next flashpoint for the global financial system.

"Alarm bells have been ringing over the explosion of corporate debt in emerging economies which now approach $US25 trillion. Damaging deflationary spirals cannot be ruled out," it said.

According to the report, much of that money has been wasted. A rate rise in the US, which should result in a strong greenback, would render a large slice of that debt unpayable. This is Ms Yellen's dilemma.

In recent weeks, Australian resource companies notched up billions of dollars of losses as they wrote down the value of investments made at the height of the boom in an unprecedented failure of free market judgement.

Could Governments make similar mistakes? Undoubtedly. But consider the amount of debt that developed world Governments, via their central banks, have spent for little return. Imagine what could have been achieved if Governments had spent just a portion of that directly. And spare a thought for the debilitating effects of zero and sub-zero interest rates.

Mr Lowe is determined to not follow that path. But it may require another global crisis for him to convince Australia that Governments need to play a more active role in the economy.