temporary, massive fall in employment, and sharp interest rate volatility are required for releasing ineffectively used capital and labor in the economy, to be hoovered up by stronger businesses
This argument really needs more economics to back it up, because the trouble with the "creative destruction" line of reasoning is that you get the destruction first and the creation is far from guaranteed.
A big fall in employment is something that has real human consequences in misery, ill-health, and even death. Likewise a capital collapse tends not so much to release capital as destroy it - both in terms of capital values and actual physical capital of abandoned buildings. Detroit's vast areas of abandoned real estate aren't capital that's freed, they're capital that's destroyed one burnt-out building at a time.
Stability is vastly underrated. There are plenty of less stable economies and they do less well. Stability enables planning.
Also, your interest rates/capital investment argument is the wrong way up. The normal understanding of how interest rates affect inflation is that high rates reduce inflation by reducing investment ( e.g. http://www.bankofengland.co.uk/monetarypolicy/Pages/how.aspx ). Raising rates makes it less attractive to make physical investments and more attractive to just leave the money in bonds. Conventionally to encourage more investment we need lower interest rates.
This argument really needs more economics to back it up
Japan has been engaging in this kind of monetary policy for over two decades.
Bloomberg: "Japan Must Let Zombie Companies Die"[1]
A big fall in employment is something that has real human consequences in misery, ill-health, and even death.
I don't think that's a valid argument to prevent short-term unemployment at all costs. Winter brings death to trillions of leaves every year. Does that mean it should be stopped? Half a decade ago Detroit's situation was hopeless. Detroit declared a long overdue bankruptcy in mid-2013. By mid-2015, it's described as a "revival template for struggling U.S. cities"[2]
Also, your interest rates/capital investment argument is the wrong way up.
I'm afraid it is the right way up. The effect you're describing is only valid in the short-term, but it is completely the opposite in the long term. In the long run, nominal interest rates = real interest rates + inflation[3]. As you raise nominal rates, real interest rates remain constant, and inflation must rise to compensate. To encourage investment in the long run, we need higher interest rates. Lower interest rates increase spending in the short term, following the effect you've described. In the underlying economy, this increase in spending is funded by consumption of real capital. (e.g. refraining from capital maintenance and using the funds for consumption activities instead.)
In the underlying economy, this increase in spending is funded by consumption of real capital. (e.g. refraining from capital maintenance and using the funds for consumption activities instead
Surely it's funded by expanded credit - after all, that's the transmission mechanism for this?
And I said that raising nominal rates causes inflation to fall, so I think we're agreeing there. Which in the current environment would imply CPI deflation and the ills thereof.
This argument really needs more economics to back it up, because the trouble with the "creative destruction" line of reasoning is that you get the destruction first and the creation is far from guaranteed.
A big fall in employment is something that has real human consequences in misery, ill-health, and even death. Likewise a capital collapse tends not so much to release capital as destroy it - both in terms of capital values and actual physical capital of abandoned buildings. Detroit's vast areas of abandoned real estate aren't capital that's freed, they're capital that's destroyed one burnt-out building at a time.
Stability is vastly underrated. There are plenty of less stable economies and they do less well. Stability enables planning.
Also, your interest rates/capital investment argument is the wrong way up. The normal understanding of how interest rates affect inflation is that high rates reduce inflation by reducing investment ( e.g. http://www.bankofengland.co.uk/monetarypolicy/Pages/how.aspx ). Raising rates makes it less attractive to make physical investments and more attractive to just leave the money in bonds. Conventionally to encourage more investment we need lower interest rates.