Thermodynamics of Capitalism vs Zero Interest Rate

The 2nd Law of thermodynamics expresses that slightly viscous gas/fluid dynamics includes turbulence as cascade of ordered kinetic motion/energy from bigger to smaller scales which is terminated by dissipation into heat energy as smallest scale unordered kinetic motion/energy. The cascade of turbulence into heat energy puts a limit to the increasing strains building from gas/fluid particles with different velocities brought into contact by slightly viscous convection thus allowing the flow to persist over time without blow up or break down. 

The turbulent dissipation is viewed as a loss of large scale ordered kinetic energy or cost, which is necessary to keep slightly viscous flow alive. It is considered to be a loss since the produced low-quality heat energy as unordered kinetic energy cannot fully be recycled into high-quality large scale ordered kinetic energy, because the precision required is not available. You can burn a book into heat energy and ashes, but you cannot reconstruct the book from the ashes. This is developed in detail in Computational Thermodynamics.

One can make a connection to the Schumpeter's Creative Destruction as the incessant product and process innovation mechanism by which new production units replace outdated ones as an essential fact about capitalism. 

The creative destruction is a loss of value of process and product capital and it seems natural to balance with an interest rate as a loss/cost of financial capital. 

A capitalistic system can then be seen as slightly viscous flow in which large strains can develop because free enterprise as ordered large scale kinetic energy is allowed, and then as a system which needs a certain level of creative destruction balanced by interest rate to keep going without break down. 

In particular, setting the interest rate to zero (ZIRP), would give a system without financial limits prone to break down. This is what we are now witnessing unfold after 20 years of zero interest rate.  

The idea behind ZIRP seems to be to refinance state budgets out of control. Compare with this exposition of the dark side of ZIRP now coming up: It appears that a healthy bond yield/risk premium/interest rate could be 3% + inflation, thus 10% if inflation is 7%. Looks good?  

Note that turbulent dissipation is the way nature puts a limit to the increasing strains/velocity gradients building up in a slightly viscous flow so that the flow can continue/show go on. In a ZIRP capitalistic economy huge wealth gradients develop which put society under increasing strain/inequalities...  

Control of Inflation by Interest Rate?

Hyperinflation is now hitting Western society after a long period of very low interest rates and money printing combined with low inflation. State Banks are now raising interest rates to curb the inflation. But is this possible and advisable? Let see what common sense can say:

1. Interest rates can be seen as a cost of capital balancing risk. With very low interest rates anybody can borrow big money for any investment, many of which will not deliver, and that is not good. On the other hand, with high interest rates even clever people will not dare to invest, and that is not good. So a moderate interest rate maybe around 2-4% may be optimal. Instead we have had a period since 2008 with essentially zero interest rate with raising stock and housing markets to record levels.

2.  We now see a hyperinflation caused by increasing cost of energy because of a massive turn to solar and wind energy away from fossil and nuclear energy. But this is not true inflation but simply increased costs for energy production. 

3. But you cannot lower energy costs by raising interest rates, only increase,  and so the attempted policy of raising interest rates to curb inflation caused by an energy crisis cannot work. But it seems sound to give up the zero interest rate policy, which has caused a stock market and housing bubble, which is a form of hyperinflation although it is not included in the consumer price index used to measure zero inflation.  

4. On the hand, turning to more efficient fossil and nuclear energy production would lower consumer price index to a deflation, which would give people more for the money and it would be insane to seek to balance by letting interest rates go negative as has been the current policy.

5. So the way out of the coming crisis is to return to fossil and  nuclear energy production, and that is what we are now seeing coming. This is nothing which is controlled by a very low or very high interest rate, a moderate would be fine. The obsession by the Swedish State Bank boss Stefan Ingves to seek to control inflation up and down by the interest rate up and down, has been based on ideas in direct opposition to common sense and thus led to very negative consequences for people. 

Here is the variation of US inflation and interest rate over the period 1998-2022 showing that the interest rate does not control the inflation: