Economic growth is faltering and increasingly desperate measures by central banks are proving ineffective. Meanwhile, both stocks and bonds are hitting record highs. It's an each way bet on boom and bust and it's unheard of, writes Ian Verrender.

John Maynard Keynes reputedly once said that markets could remain irrational longer than you could remain solvent after losing a substantial amount of dosh on a trade gone wrong.

While there's no direct evidence of him ever mouthing those exact words, he was pretty clued up on just how irrational the world and markets could be.

Just consider the past month. Any rational investor would pull their cash out of the market right now as economic growth continues to falter and as governments fret about deflation.

But it is not to be. Wall Street finished the month on a tear, close to an all time record, just as America revealed second quarter annual growth of just 1.2 per cent, well below the expected 2.6 per cent.

It was a result that almost certainly derails the US Federal Reserve's plans to hike interest rates next month and came just hours after the European Union reported a similarly tepid economic performance.

Eurozone growth slowed in the second quarter with an annual rise of 1.6 per cent.

Meanwhile, stress tests of European banks again revealed massive problems in Italy's banking system while two major UK banks, Royal Bank of Scotland and Barclays, performed poorly.

The world's oldest bank, Italy's Bank Monte dei Paschi di Siena, was the worst performer, and was bailed out over the weekend. It's no minnow, by the way. As Italy's third biggest deposit taker, it's a too-big-to-fail operation.

Germany's Deutsche Bank passed the stress test but so far this year has seen its market value decline more than 43 per cent. It is a similar tale across much of Europe and it indicates the Continent's banking system is ill-equipped to handle another crisis.

Meanwhile in Japan, the central bank on Friday developed a severe case of cold feet, with a decision to not push even further into the monetary policy unknown.

It was expected to embrace a new round of radical policy known as Helicopter Money. While it did announce an extra round of stimulus, with a policy to pump even more cash into the economy, it opted not to board the chopper.

Helicopter Money is a process where the government rains cash down on the country with direct deposits into citizens' and company accounts.

The idea is that this would be financed by the central bank buying government bonds. That, however, is a policy that ultimately destroys the concept of an independent central bank, as monetary policy is employed to finance government largesse.

The fact that it was a close call tells you that not only is it being considered but that the global economy is in serious trouble.

After decades of poor performance, Japan has embraced the most radical monetary policies the world has ever witnessed and on a scale that could never have been imagined.

It has ramped up its Quantitative Easing program - a euphemism for money printing - to never before seen levels and hacked interest rates to below zero, a policy it swore it would never embrace.

On Friday, Bank of Japan governor Haruhiko Kuroda merely tinkered around the edges with some modest extra spending. More importantly, he raised questions about whether the central bank had gone far enough and said it was time to assess the impact of their policies.

On Tuesday, our very own central bank gathers to ponder the very same questions. It will be Glenn Stevens last meeting as governor.

Pressure is mounting for the Reserve Bank of Australia to apply pressure to the currency, to deflate the Australian dollar in a bid to boost inflation and lift global competitiveness.

At 1.75 per cent, our rates are the lowest on record. But they are still well above those in most of the developed world, attracting cash from the globe and pushing the currency higher. While last week's inflation numbers were weak enough to allow another cut, it won't be an easy decision.

Having deliberately fired up the already inflated east coast housing market to promote a construction boom, the central bank can ill afford for prices to head further into la la land.

Stopping that will require it to restrict lending for housing, a policy it has been reluctant to implement and even more hesitant to enforce.

Then there is the point Kuroda made on Friday. Would another cut have any beneficial impact? Would it encourage greater consumption or ignite business investment?

The answer is probably no. Australians have the highest household debt in the world and the rate cuts have prompted many to merely pay down their loans quicker. There is nothing wrong with that. But the point is, it comes at the expense of boosting consumption and business turnover.

When it comes to business, lower rates have had the perverse effect of inhibiting investment. Shareholders, unable to secure a decent return on bonds or cash, have demanded ever greater dividends from corporations.

Rather than reinvest profits into the business, most corporations have succumbed to shareholder pressure, paying out an ever greater proportion of their earnings in dividends. Similarly, given the global uncertainty, they have shied away from taking on massive amounts of new debt.

In another indication of just how nervous our business leaders have become, takeover activity, which normally runs hot when markets are in overdrive, has all but dried up.

When the takeover for logistics group Asciano last week was wrapped up, it left a deathly quiet in the mergers and acquisitions departments of our big investment banks. There's now officially nothing happening.

Meanwhile, the tension between those betting on calamity and boom continues.

US 10 year bond prices rose Friday, slicing the yield to just 1.45 per cent, after the lacklustre economic growth figures were released.

While that is not as low as the 1.31 per cent record of a month back, it indicates the incredible demand for those seeking the shelter of a safe haven.

Similarly, gold prices continued to push higher. With interest rates close to or even below zero, gold once again has become the choice for those seeking a safe harbour.

For more than two years, bonds and stocks have been heading in the same direction. Both have been hitting record highs. It's an each way bet on boom and bust and it's unheard of.

Something has to give at some stage. Either the global economy will recover, rates will rise and those holding bonds or overpriced real estate will do their shirts. Or stock market investors will wake up one day and discover that central banks have run out of ammunition causing a stampede for the exits.

Either way it won't be pretty.

Ian Verrender is the ABC's Business Editor.