jmherbener2. Lengthening means that the new set of production processes take more time to complete than the old set. For example, the old set might be (1) mine iron in existing mines using existing equipment (2) produce steel with the iron in existing steel mills using existing equipment (3) fabricate car fenders with the steel in existing fabrication factories using existing equipment (4) assemble cars with the fenders in existing auto factories using existing equipment. With lower interest rates a new set of production processes become profitable. The new set requires more mines to be opened up which use new equipment and more steel mills to be produced which use new equipment and more fabrication and auto factories to be build which use new equipment. The new set of might be (1) mine iron in existing mines using existing equipment (2) produce steel with the iron in existing steel mills using existing equipment (3) fabricate new drilling equipment with the steel (4) open up new mines which use new equipment…and so on until new cars are produced. The new set of production processes take more time to complete than the old set.
4. The underlying factors affecting any particular interest rate include not only time preferences, by uncertainty associated with the loan, and anticipations concerning price inflation. All three of these factors work against the suppressing effect on interest rates of credit expansion. When the borrowed money from credit expansion is paid as income to those who produce the goods being bought with the borrowed money, they disburse it according to their time preferences which reduces the supply of credit from its artificially expanded amount and raises interest rates. As credit expansion proceeds, the additional credit must be extended to less credit worthy borrowers. Interest rates rise as risk premiums grow. Credit expansion occurs via monetary inflation, which tends to push the purchasing power of money down. Interest rates rise to compensate. Fed monetary inflation and credit expansion cannot stay ahead of these underlying factors indefinitely. The reason is people are always striving to economize. Imagine what would happen if the Fed engaged in monetary inflation and credit expansion of a small amount for a short time, say $10b for a month. Interest rates would quickly recover their time preference level keeping the losses from malinvestments to a minimum. People are engaged in the same economizing counter-reaction to Fed expansion even if it goes on for a long time in large amounts.
5. What Joe argues is that the two tendencies–for resources to move to the higher stages and to the lower stages–cannot be satisfied consistently. At most, resources are pulled from stages in the middle of the capital structure to the higher and the lower stages (where profit is larger at least initially), which implies that the new larger capital structure set in motion by building up the higher stages cannot be completed for lack of resources to build-up the complementary middle stages. When the demand for middle-stage capital goods grows in intensity, the profitability of shifting resources from the higher and lower stages reveal the malinvestments made there.