area they fell below their 1930s levels. and why have they stayed so low, even accepting that the united states has gone some way to restoring them to a more neutral level? the answer has to be that inflation has remained so low. if inflation had picked up in the way that it did in earlier cyclical recoveries, central - bank - determined interest rates would have risen more by now. so the real issue is why have inflationary pressures stayed so low? an ex ante excess supply of world saving means that it would be unlikely for a situation of generalised excess demand in the world's goods markets to occur, and hence for inflationary pressures to emerge. another way of thinking about this is to remember that a surplus of savings in a given country means that the country is producing more goods and services than it absorbs in domestic spending. in china's case, there has been a massive increase in its capacity to produce manufactured goods, and its domestic spending has not kept pace with the expansion in supply. the result has been a rapidly growing supply of lowcost manufactured goods supplied by china to the rest of the world. the same has been true on a smaller scale for other asian countries running surpluses. the increased productive capacity in china and other parts of asia can be seen as part of the mechanism by which their trade and current account surpluses have been exerting downward pressure on global inflation. 7 / 10 ( iv ) why bond yields have remained at historically low levels the fact that bond yields have remained low despite rising oil prices and the fed raising short - term interest rates is really the nub of the issue. if excessive us spending and inadequate saving were the main story affecting the world economy, bond rates would be rising not falling. clearly, developments in the bond market are far more consistent with a world of plentiful saving than one of excessive spending and borrowing. the low level of nominal interest rates may be partly explained by the forces already cited which have held down inflation. but real interest rates have also fallen to extremely low levels. 6 ( graph 5 ). thus, it is not only inflation and inflationary expectations that are at work – the real demand and supply for borrowed funds must have changed. in economic terms, a fall in price suggests that the supply curve of saving has moved outwards relative to the demand curve. ( v ) why risk margins have narrowed again, this is entirely consistent with a world of excess supply of funds looking for attractive yields

one hand, because, despite the fact that the rate of increase of doubtful assets has eased, the setting aside of provisions for impairment will continue to weigh down profits. and on the other, because the narrowing of the net interest margin resulting from higher financial costs will hardly be offset by bigger volumes of activity. accordingly, reducing overheads, which must be quickly and resolutely done, is the main instrument for softening these adverse effects on profits. spain and the spanish banking system need their creditors to roll over the funding they have extended to them. the best way of achieving this is to demonstrate day by day that banks and savings banks are healthy and profitable, and that their profit and loss accounts provide them with the flow of funds needed to honour all their commitments. conclusions i shall conclude by reiterating the central idea in my speech. the government has already taken various measures in the right direction. what is important now is to persevere along these lines, adhering to two underlying principles : budgetary austerity that provides for fiscal consolidation, and structural reforms. as regards the banking sector, those responsible for its supervision and regulation, and most importantly the institutions comprising the sector, must complete the restructuring under way. there can be no room for wavering, as that can only give rise to interpretations that undermine our creditors ’ confidence. in sum, the reforms in train must be seen through, so as to cement international investors ’ confidence. thank you.