jmherbenerCredit expansion has disparate effects on the prices of capital goods throughout the capital structure. When the supply of credit is expanded by banks issuing fiduciary media, then interest rates will be below their levels on the unhampered market economy. Interest rates are not only on money borrowed under contract in loans, but rates of return on investment in production and rates of return on investment in capital capacity. When the credit expansion funds are borrowed, they are spent into particular lines of production, e.g., housing, automobiles, lumber mills, auto factories, and so on. In making production decisions, entrepreneurs must predict the net income and net worth of their investments in particular lines of production and particular lines of capital capacity. It’s not simply a matter of predicting interest rates. Moreover, even if savvy entrepreneurs avoid mal-investments, the money inflation and credit expansion have changed the actual conditions of demand and supply in credit markets. Loans will be extended, then, to less savvy entrepreneurs and less credit-worthy consumers. This makes malinvestments more likely, not less likely.
Take a look at the article by Lucas Engelhardt: