(Image link if you can't see it)
So, for the intuitive example of water, low temperatures usually give ice, high temperatures usually give water vapor, and in-between, moderate temperatures and pressures allow liquid water. Science 101, sure, but I bring it up for the (hopefully) useful concept of the triple point. The triple point is the intersection point along the phase boundaries where three different states can coexist and easily tip into any of the distinct, bordering states. And I can't help but think that we are close to the economic equivalent of the triple point. Here's my thinking...
A thought experiment
[TL;DR: all of your ideas are correct at the same time.]
If we were to plot a phase diagram for the economy, our two axes might be interest rates and debt load and the states of the economy might be inflation, deflation, and stagnation. In the US, interest rates broadly have been going down since the 1980's, and we find ourselves pretty close to zero, but just above it. Around the world, some places are below zero, some are at zero. This is the economic triple point.
Barring some black swan reorganization of the financial system (global debt jubilee?), the interest rates can go three ways from this economic triple point: up, down, or zero.
- Up: Debt loads are so massive that slight increases in interest rates tip the system into inflation, because the only policy way to relieve the crushing burden of all that debt is to inflate it away. The problem with intentionally trying to inflate away the debt, outside of the fact that it violates one of the two Fed mandates (employment, stable prices), is that it can easily get out of control and shoot to the moon. Gold bugs might do very well in this state of the system. Holding bonds would be a disaster.
- Down: In a race to the bottom to devalue currency, interest rates can keep on chugging deep into the negative. The system here is in deflation because spending $130 to get back $100 in the future ultimately reduces money supply (right??). Long term this is unsustainable, because it literally turns the banking business model upside down (borrow short/lend long doesn't work). See Japan and European bank stocks. Without a workable banking sector, modern economies cannot function—the patient can only be bled so long. But in the meantime, falling rates are good for bonds, even if rates are negative because the prices still go up, and bad for stocks because appreciating inventory incentivizes slow turnover/sales/waiting-instead-of-moving-forward.
- Zero: The system near zero is in a state of stagnation. Real growth in the economy is very slow or non-existent for a number of reasons. 1. Unproductive, zombie companies can keep limping along financed by cheap debt. 2) Any company that can borrow for less than the rate of its dividend will just buy back its own stock instead of make capital investment (it's a no-brainer balance sheet move) 3) etc. The main theme here is that money continues to be so inefficiently allocated that the best the economy can do is tread water. Stocks may be the cleanest dirty shirt here, even "growth" stocks with negative cash flows. Cash and bonds and everything else stink. TINA. But that party can't last forever right? Zombies do eventually die, right?
Ok, I'll leave it at that. My intention wasn't to be comprehensive—I'm just throwing this idea out there for discussion. Please tear it apart, add to it, ignore it as you see fit.