Zero Interest Policy and the New Abnormal: A Critique

ABSTRACT

In the "New Normal" central banks set their interest rate to zero and print money through massive quantitative easing, while finance ministries run huge fiscal deficits. Yet inflation remains minimal. This book explains why. It also explains why the New Normal is really the New Abnormal, and why it can't last. The academic roots of the New Abnormal are traced to a conceptual confusion about the "natural rate of interest,"' and postmodernism in macroeconomics, exemplified by the DSGE (dynamic stochastic general equilibrium) movement. A theory of "existential risk" is developed, which is concerned with the collapse of political economies such the Bretton Woods system and the New Abnormal. Existential risk expresses itself in the growing gap between the natural rate of interest, measured by the rate of return on capital, and the real rate of interest. Existential risk is also expressed in the development of cryptocurrencies. A theory of "kinetic inflation" based on Keynes' liquidity trap is developed, which accounts for the absence of inflation in the New Abnormal, and predicts its outbreak when zero interest policy ends. The adverse social consequences of the New Abnormal for fertility, pensions, house prices, economic inequality, and intergenerational equity are explored. A causal link is established from the New Abnormal to Covid-19 mitigation policy, and from the latter to the intensification of the New Abnormal. Finally, the prospects are assessed for ending the New Abnormal, and an orderly return to the Old Normal. The alternative is to crash out of the New Abnormal chaotically. © Michael Beenstock 2022.