Reply To: Overinvestment


Thanks. If we imagine a production structure with five stages (each of equal duration) why is it that lower interest rates disproportionately favor expansion of the higher stages? If each stage takes the same amount of time, why would low rates favor stages more temporally removed from consumption? Wouldn’t investors just be concerned about their one year long production process instead of the five years to consumption? Also, when we say that these production processes prove unprofitable, how is this unprofitability ultimately revealed? Is it that when interest rates eventually rise future business loans are more expensive than anticipated or that the unexpected competition for factors of production between lower and higher stages lead to higher factor prices than originally expected?