The central bankers fundamentally have little or no faith in the market mechanism. Let markets clear and then growth will appear, similar to a burned down forest. Burn off the dead economic wood. Let some sunlight hit the forest floor and then, come next spring, a new generation of trees will begin to grow. It is during this “spring” that opportunities abound for real wealth creation and consolidation. I pray I see a moment like this in my lifetime.
Of course, an economy that has been thrown into disequilibrium by negative interest rates may display many weird anomalies before succumbing to the “crack up boom,” as described by Ludwig von Mises.
One early indication of loss of confidence in money is a commodity boom in precious metals. Prices rise faster and faster and production collapses. The public understands that the monetary authorities have no intention of reversing their negative interest rate policies and restoring sound money and banking. In a mad rush to save their wealth from total destruction, the public will start to buy what it hopes to be assets that will not depreciate. This sets off a huge boom in some asset categories; thus the “boom” portion of Mises’s “crackup boom” scenario. But the crackup follows on the boom’s heels.
The real pity is that the busts and crackups could all have been avoided if central bankers recognized that falling prices eventually create the conditions for a normal economic revival. Deflation is not a death spiral as the Keynesians believe. In a functioning market, the public’s demand to hold money will be satisfied when their reserves of money balances are sufficient in relation to the price level, when they are once again confident of the future, and when they are willing to invest for the long term.