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What The World Needs Now, It's Getting: Cheap Money



Plunging interest rates can be both a short-term tonic and a spark for sustained economic growth

Welcome to a world of cheap money. In the past three months, 30-year U.S. Treasury bond yields abruptly plunged below 6.75% for the first time ever. And long-term interest rates in Britain, Germany, and Japan fell sharply, too.

This sudden decline in rates, the "money shock" of 1993, could have as dramatic an impact on the world economy as the oil shock of 1973. But unlike the oil shock, which sent the global economy reeling into recession, cheap money may be just the medicine to pull the industrial world out of its slump.

Indeed, cheap money--if it persists--could set off an era of sustained economic growth without triggering a new bout of inflation. Cheap money means that the cost of capital stays low and investments become much more affordable. Higher rates of investment will boost productivity. Better productivity raises economic growth and keeps a lid on inflation. "In the '90s, we could have a low and stable cost of capital, more capital-intensive investment, more business investment, and more productivity gains," says Neil M. Soss, chief economist at First Boston Corp.

The money shock had been building for a long time as inflation rates around the world declined. Long-term interest rates have been falling since the second half of 1990. Yields on 10-year government bonds have dropped by 2.5 percentage points, to 5.9%, in the U.S., b

Amy Barrett in Glendale, Calif., with Zachary Schiller in Cleveland

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