Combining The Ultraviolet Catastrophe and The Innovators Dilemma: Learnings for Monetary Policy

In the late 19th century, the world of physics faced an existential crisis which is now known as the ultraviolet catastrophe. The mathematical formulas framed at that time predicted that all matter will instantaneously convert into energy and the universe should not exist.

However, in early 20th century Max Planck postulated that light is quantized meaning light is both a wave and also a particle. That particle is now known as photon. By quantizing the mathematical equations, it became clear that matter will not instantaneously be converted into energy and the crisis was averted. 

In the current economic situation, it is becoming very clear that there is no easy way out of infinite printing of money. The only solution for all economic problems seems to be printing more money and possibly increasing fiscal deficit. 

However, that does not seem alright to any rational observer. The solution lies in understanding that most corporations prefer efficiency innovations over disruptive innovations. This has been explained lucidly in the famous book “Innovator's Dilemma.”

Efficiency innovations deploy capital for a very short duration and generate high returns immediately. On the other hand, disruptive innovations require long duration to produce results. 

Now compare the situation of typical yield curve in any currency. The yield curve is upward sloping. This means market is also punishing disruptive innovators and preferring to deal with efficiency innovators only. 

The solution to this dilemma is to quantize the yield curve by artificially pulling long rates significantly below the short rates. This bifurcation of yield curve, howsoever seemingly artificial will ensure that nearly all businesses have incentive to focus on disruptive innovation. It is disruptive innovation which creates jobs and long-term growth. By quantizing the yield curve, we can avoid the catastrophe of infinite printing of money which seems to be staring at us right now across the world. 

This post is merely a teaser into an interesting idea. please submit your views in the comments below.