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One lesson that has clearly emerged from the credit crunch is that low interest rates can cause enormous distortions in the financial markets. First, they cause even cautious investors to take more risk as they search for yield. Second, they allow speculative investors to use borrowed money to buy risky assets such as houses.

The problem was observable back in the days of the dotcom bubble. The value of dotcom companies was all in the promise of future profits – investors used low prevailing interest rates to discount those profits, giving the stocks a high present value. The collapse of the dotcom bubble caused, of course, another round of interest rate cuts. It did not, however, recreate the boom in equity markets, which were de-rated during much of this decade.

A recent note from Goldman Sachs argues this was because most savings were in the hands of developing-country central banks, which had a natural preference for government bonds and short-term notes. In turn, however, that drove western institutions to seek out higher-yielding assets, leading to the creation of all those mortgage-backed securities and CDOs that have caused so much trouble.

Now interest rates are even lower than ever. That helps explain why equity and corporate bond markets have rallied from their end-2008 lows, as investors have sought alternatives to low-yielding cash. It also explains the tentative signs of life in the housing market, as mortgage payments have fallen sharply.

But this has been accompanied by a sharp steepening of the yield curve. Inflation figures remain low, in spite of high commodity prices (oil is acting as a tax on consumers at the moment). Investors have, nevertheless, taken fright at the sheer scale of government bond issuance – the 10-year Treasury bond yield has almost doubled from the low of just over 2 per cent at the height of the crisis.

So we don't have quite the same market conditions as we did in the late 1990s or the middle part of this decade. Investors are keen for income and yield, but are suspicious, having been caught out by two bubbles in the course of a decade. It will take time for the next bubble to appear, and there are few obvious candidates. Neither green stocks nor emerging markets offer much of an income.

Nevertheless, investors need to be careful. The 'safe' level of income they can take from a portfolio has almost certainly come down. Two decades ago, they might have expected a double-digit return. Earlier this decade, they probably hoped for 7-8 per cent. But in a world without inflation, those numbers are way too high. A yield of 4-5 per cent is much more like it – anything higher than that, and investors risk significant capital loss. Those who bought mortgage-backed debt have already learned that lesson.

The main worry is that banks will come up with another host of structured products that appear to offer higher yields but, in fact, expose the investors to significant risk (including the risk that the counterparty might default). The charges on these products are high. They can only be justified in rare circumstances – a client who is unwilling to have any equity exposure without a guarantee of return of capital.

There are no shortcuts. If we face a world where the economy struggles with its debt burden for several years, rather like Japan in the 1990s, then investors are going to have to adjust their sights. Yields will be lower, and that means those in work will need a bigger capital sum to generate their chosen level of income. And those already in retirement will have to get used to a lower standard of living.