Pressing on the interest rate lever is a lot like putting a foot on the accelerator of a vehicle. Burning more fuel in an attempt to speed up. In the case of the modern economy, cash is the fuel. But what happens when you press down hard, but the engine is broken? Big clouds of smoke, but little output.
Cheap money is only useful if it’s allocated productively — producing and purchasing the goods and services that are in demand. If credit has an allocation bias toward production (capital) and not wages (labour) / consumption, there is a tendency toward overcapacity without the demand to buy the goods. If the credit has an allocation bias toward consumption, the result can be inflation. However, there is a third factor of production where credit can be allocated toward: land.
Do a quick search for news on property markets, and for most countries you’ll see articles about the property boom continuing despite economic weakness. We cannot conflate land with property in an economic context, because land is fixed in supply, but built-property can increase in supply (e.g. dwelling units, office space) in response to an increase in demand. However, land prices are generally driving this boom.
Such a dramatic increase in land prices signals a broken engine, because the supply of land is completely inelastic to price. The property boom is only worsening consumer debt issues, and making housing unaffordable. In a functioning market, you would expect countries with large current account and trade deficits to allocate this credit toward increasing domestic production. In countries with large current account surpluses, you would expect the monetary expansion to be allocated more toward domestic consumption.
Economic incentives are therefore highly skewed, and this is not something that can be solved with monetary policy. In the current geopolitical environment, it doesn’t look like it can be solved with freer trade policy either. A flexible currency regime should address many imbalances automatically, but the distortions are so embedded in the tax/subsidy/regulatory web that this has not happened. Therefore we need to look at what we can change more immediately, which is the tax (and regulatory) code.
The tax burden needs to be shifted away from producers and consumers, especially in countries with current account deficits and surpluses respectively. An overall decrease in the tax burden is certainly necessary, but the answer to where to shift the burden to is obvious: land.