In recent days Paul Krugman has been flailing a model of the term structure of interest rates and the liquidity trap based on the idea that there is an absolute lower bound of zero percent for nominal interest rates. This may have been true in the distant past, but it is not true anymore. We have seen numerous episodes of negative interest rates, with several outbreaks in the last few months, including on the actual federal funds rate and on 90 US Treasury bills, as well as on Japanese interbank rates in the late 1990s, when their target rate was at 0%. A not widely known episode that went on off and on between August and November of 2003 was in the repo market, which used to be used by the Fed for open market operations, as reported in a New York Fed study from April 2004 by Fleming and Garbade, accessible at http://www.newyorkfed.org/research/current-issues/ci10-5.html. It has only been convention and a left over belief like the old religious view that negative numbers did not exist that has led so many economists and others to think that zero is some absolute lower bound on interest rates. We may well see that bound breached more seriously and frequently in the months ahead, if the economic crisis continues to deepen.
The prejudice against believing in negative interest rates, sometimes viewed as the "price of time," is not unrelated to the long-held opposition to the idea of negative prices. We see them regularly in real life, but they often get assumed away by defining paying for the removal of something (such as excess water) as a different market with a positive price from providing the same good when we want more of it (water for irrigation), even when the same activity does both things (building a dam with an irrigation system). Negative real estate prices often are associated with environmental problems, such as kaput coal mines leaking toxic waste that the owner is responsible for paying the cleanup of. In some countries, brides have a positive price while in some grooms do, although as Michael Perelman recently reported, Herodotus tells us of bride auctions in ancient Babylon where some are sold for positive and some for negative prices in the same auction. The great efforts by the general equilibrium theorists to avoid negative prices (not a problem for Walras) were a waste of time, as were all the huffings about negative surplus value in the Sraffian debates. Time to get over it, especially if we start seeing widespread negative interest rates.
Hidden conclusion here.