> What's the magic that happens at zero that causes otherwise nonsensical projects to make economic sense?
The bulldozing-mountains example is purposefully over-the-top (I believe I first heard it in an article by Bernanke[0]). The point that I am trying to illustrate is that at a 0% interest rate, the traditional marginal cost/marginal utility analysis breaks down, since as long as the marginal utility of the last investment dollar spent outweighs the marginal cost of spending that dollar (the interest rate), traditional economic thinking would have you spend that dollar.
> Exactly. I think he's assuming he'll never have to pay back the principle.
The rocky-mountain example does assume this, but it doesn't make a 0% interest rate any more ludicrous. Imagine that you could take out a loan for $x at 0%. Simply because of the fact that time gives assets the opportunity to grow, the future value of that loan when it is to be repaid is greater than the value when you received the loan [1]. Of course, the 0% rate would remove some traditional investment options (savings account, Treasury bonds, etc.), I think it is reasonable to assume that investments will still be able to appreciate to some degree.
However, this appreciation would be constrained in reality by inflation if the real interest rate is 0%. If, on the other hand, the nominal interest rate is 0%, then the loan effectively counteracts the headwind of inflation, and any return, no matter how small, winds up in your pocket.
[0 (7th paragraph)] http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/31... [1] https://en.wikipedia.org/wiki/Time_value_of_money