[britknight]

(In response to above as well as parent)

> What's the magic that happens at zero that causes otherwise nonsensical projects to make economic sense?

The bulldozing-mountains example is purposefully over-the-top (I believe I first heard it in an article by Bernanke[0]). The point that I am trying to illustrate is that at a 0% interest rate, the traditional marginal cost/marginal utility analysis breaks down, since as long as the marginal utility of the last investment dollar spent outweighs the marginal cost of spending that dollar (the interest rate), traditional economic thinking would have you spend that dollar.

> Exactly. I think he's assuming he'll never have to pay back the principle.

The rocky-mountain example does assume this, but it doesn't make a 0% interest rate any more ludicrous. Imagine that you could take out a loan for $x at 0%. Simply because of the fact that time gives assets the opportunity to grow, the future value of that loan when it is to be repaid is greater than the value when you received the loan [1]. Of course, the 0% rate would remove some traditional investment options (savings account, Treasury bonds, etc.), I think it is reasonable to assume that investments will still be able to appreciate to some degree.

However, this appreciation would be constrained in reality by inflation if the real interest rate is 0%. If, on the other hand, the nominal interest rate is 0%, then the loan effectively counteracts the headwind of inflation, and any return, no matter how small, winds up in your pocket.

[0 (7th paragraph)] http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/31... [1] https://en.wikipedia.org/wiki/Time_value_of_money

[hderms]

I guess that assumes infinite access to credit? Otherwise there would be an opportunity cost associated with bulldozing the rocky mountains in favor of some other activity with higher marginal utility, right?

[dllthomas]

Time gives the money a chance to grow if there is anywhere that offers a safe return. Lending at a negative interest rate is paying someone to keep your money safe. Borrowing at a real negative interest rate may not make sense if you aren't sure you can do that.

[fsk]

Actually, it was a bad example.

Suppose you spend $1M to produce something worth $100k. You lost $900k.

But suppose you borrowed at 0% while inflation was (to use round numbers) 10%. After about 50 years of borrowing at 0%, your $100k is now worth more than $1M. (I'm too lazy to use logs to figure out the exact breakeven point right now.) You made a profit.

With 0% interest rates, your investment that destroyed $900k of value was (eventually) profitable. If you can avoid mark-to-market accounting, you can just borrow, wait for inflation, and eventually sell for a profit.

When interest rates are less than inflation, a capital-destroying investment can seem profitable.