posted on Oct, 8 2013 @ 05:26 PM
Here's how I understand malinvestment...
In a free market economy, real interest rates would lower as more bonds are bought (because lenders don't have to offer as much incentive when demand
is good). Low interest rates simultaneously make long-term loans more attractive, encouraging business to invest in long-term projects, R&D and so
forth. They know it will pay off because people are spending less currently and saving more for later.
While this happens, resources are similarly diverted from short-term production to long-term production. Projects are more tailored to the limits of
production such as resource extraction, manpower and funding. A beautiful, harmonic trade off between these factors occurs when interest rates reflect
real demand and when they make accurate statements about what people are doing with their money.
When a central bank, like the Federal Reserve, is buying $86 billion dollars worth of bonds a month, there is no competition driving up the interest
rate; if nobody else will buy the bonds, the Fed will, so why raise interest rates? This #ers up the whole economy. Both short-term and long-term
production is occurring and the limited factors of production cannot accommodate both. Many projects go unfinished, such as housing developments in
2007, and then we have periodic busts. Projects finished later don't generate the expected profits because nobody has actually been saving, not to
the degree the fixed interest rates suggest. That's called the business cycle and I'm pretty sure I have it straight.
Ludwig on Mises explained it in a metaphor in his generational work, "Human Action." He said, imagine an economy of one man or woman. He said "one
man," but that was the 1920s. This man decides to build a house, and with no accurate measure of the availability of resources, he decides to build
an arbitrarily large house. The problem is, his plans call for 20% more bricks than he has. He begins building, and the economy of one man looks good,
for awhile with full employment, increase in equity, and ideal wealth distribution. Should a third party looking on at this doomed economy and
intervene? In the short-term, he's doing well for himself, he has hope. But in a couple of years he will have most of a house that's always flooded.
What the Federal Reserve does consistently, is gets him drunk.
So the assumption that interest rates /will rise inevitably/ comes from the imminent realization that there isn't enough capital to support all of
the ongoing projects, and more importantly, businesses are failing left and right, so on the supply side there is simply not enough going around
(shortages). So maybe first there is over-harvesting of a jungle to provide more timber > which destroys the ecosystem of the lac beetle > shellac
harvested from an anal gland in that beetle drops > candy companies like Skittles have to discontinue shiny candy products which makes some of their
means of production idle. In this case over-harvesting actually causes waste. There is also price distortion which causes waste in another way, but
that's a topic for another post.
Here's the thing. If interest rates rise, which they inevitably will, the interest rate derivatives bubble will pop. It's worth $441 trillion
according to the Bank of International Settlements. The larger derivatives market is much larger, around $5 quadrillion worth of derivatives. But just
the $441 trillion interest rate derivative market imploding would send ripples through every supply chain in the country and through much of the
world. If /just/ lumber production stalls, everything using lumber and everything using paper slows, and much of it fails. But every resource and
level of production is effected by every other one and every stutter in the supply chain compounds into other industries.