Interest rates, the flow of funds and perhaps - by default - Armageddon

Leaving that aside, however, we must also consider the fundamental issue of what low or lower interest rates mean if we decide that interest-rate hikes do not "fight inflation" but intensify the inflation as it tends to be identified by the man in the street, that is, consumer-price inflation.

If an interest-rate hike does in fact stimulate consumer-price inflation, then should we logically conclude that lowering interest rates does not intensify inflation - as we have been asked to believe - but rather reduces it?

I have maintained - since 1969 at least - that a cut in interest rates will promote fixed-capital investment and, through the beneficial impact on real investment, real productivity and real production, will lower consumer-price inflation - at the same time of course as it will tend to enhance asset-price inflation. There will be a period during which the impact on housing prices, for example, might be relatively small but it will, in the longer term, be necessary to manage the flow of funds to avoid the housing and other bubbles from which we have suffered so acutely during recent decades.

If our financial and economic management is sound, this will yield a satisfying situation at a certain interest-rate level which will deliver stable growth at stable consumer and asset prices.

However, we must consider the situation if interest rates sink or are cut to such low levels as we see in the United States and some other countries at the moment.

A logical expectation would be that, if lower interest rates produce lower inflation, at some point of reduction lower rates will turn inflation into a highly dangerous deflation most societies will want to avoid at all costs.

While we should not bind ourselves too closely to historical precedents, we should recall what happened during the Great Depression which lasted a full ten years from the Great Crash of the New York Stock Exchange in 1929 to the outbreak of World War II in 1939.

Only the war got us out of the Great Depression and freed us from what was, for the most part, a Great Deflation.

We must also bear in mind that the collapse of the bubbles in Japan in the late 1980s and early 1990s was followed by a painful period of deflation which still afflicts the Japanese economy to a significant extent. During most of that period, Japanese interest rates have been at or near zero.

That has encouraged the carry trade but it has not sufficiently stimulated domestic real investment in Japan. On the contrary, even nominal interest rates at zero have meant, for the fixed-capital investor, real interest-rate levels which can often be a decisive deterrent to the real investment crucial to employment and real economic growth.

These issues are complex. They deserve much more sound, professional, imaginative attention than they have received so far.

Keynes famously said we are all imprisoned by the ideas of some defunct economist. That is certainly true today. Even after decades of appalling error, we still stick to dogmas about interest rates which have their origin almost two centuries ago. We still neglect even to ponder the need to control the flow of funds whose chaotic, casino-like character seems even now to be reappearing and reinforcing risk under the genial protection of our central banks and treasuries.