America, but governments have taken up the slack. In those countries, wheregovernments can print their own money, this does not raise solvency concerns, and in theeuro zone, where they cannot, public debt has risen less than in Britain and America. Butagain that overall figure masks differences within the group. Debt has gone down inGermany, but it has risen sharply in the periphery (see article).These debts are bearable so long as governments can borrow at their current, low rates—2.5% in Italy, 2.2% in Spain. But if deflation sets in and nominal GDP stagnates theywill become unsustainable. Investors will insist on much higher interest rates, debt willspiral upward and fears of default will fulfil themselves. As Peter Berezin of the BankCredit Analyst, a forecast journal, says, the ECB can help a country that’s illiquid, but notone that’s insolvent. “It’s why Greece defaulted and ECB was helpless to do anythingabout it.”Loss of breathThe most troubling effect of low inflation is on monetary policy. Central banks stimulatespending by reducing the real interest rate, which is the nominal interest rate minus therate of inflation. This boosts investment and discourages saving, reducing the output gap.The real rate required to raise demand enough to balance investment and saving iscalled the equilibrium real rate. When demand is weak, the equilibrium real rate may benegative, and under low inflation it is difficult for a central bank to set a nominal rate thatbrings this about. And because nominal rates are in practice never less than zero (youcan always just keep money in cash) deflation proper makes a negative real rate not justhard but arithmetically impossible: subtract a negative number (the inflation rate, incircumstances of deflation) from a number that has to be zero or higher and you alwaysget something positive.While economists disagree on the current level of the equilibrium real rate, they broadlyagree it is lower than in the past. According to a widely followed methodology developedby Thomas Laubach and John Williams of the Federal Reserve, America’s equilibriumreal rate fell from above 4% in the 1960s, to 2% in the 1990s, and is now slightlynegative. Markets seem to share that verdict. Andy Haldane, the Bank of England’s chiefeconomist, recently noted that British markets expect real rates to remain negative for thenext 40 years, probably a good approximation of the expected equilibrium real rate.This long term difficulty in matching savings and investment has been attributed to“secular stagnation”, a term coined by Alvin Hansen in the 1930s to describe the inabilityof the American economy to return to full employment. Those using it to describe today’swoes see it as having come about in part as a response to the recent global crisis, whichmade firms and households less able or willing to borrow at any given interest rate, and inpart as the result of longer term trends.