In “National Income and the Price Level,” Martin Bailey discussed the issues of the liquidity trap and secular stagnation.
He observed that at a zero real interest rate, it would be profitable to level the Rocky Mountains and fill in the Gulf of Mexico. The land created would have a rate of return over zero. Also, replacing all steel with stainless steel would pay off.
The examples get to the problem. If someone wanted to level a mountain and fill in the Gulf, it would take a decade to get EPA approval, if it ever came. At negative real interest rates, there are plenty of profitable investments. Maybe in the medical sector, or energy, or finance, or banking, or education, or transportation….where government approval can block the investment for a decade. Secular stagnation is feasible in a world of heavy regulations and taxes, regardless of technological opportunities or the productivity of capital. Keystone Pipeline, anyone?
In a regulated state, easy Fed policy might boost the stock market and lower bond yields without boosting investment much at all. Sound familiar?