When short term rates are artificially low; the earth is still round

Artificially low interest rates cause consumers to make most of their purchases early, within the household inventory cycle. If the economy has slowed, the consumer is operating on a longer inventory cycle. So low rates move consumption up inside a longer inventory cycle.

Nick Rowe, Krugman, Thoma have joined the flat earth society. Artificially low short term rates mean two things, yield too low and term too short. This mismatch in terms get worse at the bottoms of valleys. The last half of the consumer inventory cycle is empty of transaction, the Fed having moved them all up to the first of the cycle. But in a trough, the consumer has lower transaction rates, unknown to the Fed.

Very similar to what happened with the housing tax credit, it moved house purchase up from of the cycle, but Congress had no idea that the cycle has been lengthened by the consumer. So we get many fewer houses sold for longer than we expected, deflation created.

The earth is not flat, long run equilibrium is built into out brains.