The world seems to suffer from a mass delusion that it is only a matter of time until interest rates "normalize" to pre-crisis levels. Participants at Davos are no different. But here there seems to be a new realization that normalization may be further in the future than many think.
While one conference participant was willing to hazard a prediction that rates will begin to rise in the third quarter, others were hesitant to be so bold. Another participant declared normalcy-where central banks are not intervening in markets and credit isn't being artificially created-is a decade away.
Of course that doesn't mean rates can't rise before then, but it clearly signals that policymakers are accepting a new reality regarding quantitative easing-that central banks are now a critical and virtually permanent source of capital. Modern monetary orthodoxy now accepts the legitimacy of this new role for central banks as capital providers.
What does all this mean? Normalization is slowly being redefined to recognize that rates will not return to pre-crisis levels any time soon, perhaps not for a decade or more, and the role of central banks has evolved dramatically as is evidenced by the European Central Bank's announcement today that it would purchase 60 billion euros each month from March until September 2016 of a combination of government bonds, debt securities issued by European institutions and private-sector bonds.
There will be long-term unintended consequences of this new monetary orthodoxy. These consequences include risking long-term price stability and creating price distortions in capital markets, which drive inefficient capital allocations that ultimately undermine growth and productivity.
Perhaps policymakers will use this window of opportunity to implement structural reforms to ameliorate these unintended consequences, but I'm not holding my breath.