Reply To: Overinvestment


When interest rates rise, the P.V. of longer term projects falls more than the P.V. of shorter term projects. The greater capital losses in longer term investments leads capitalist to shift toward shorter term projects. To see how this affects profitability, consider iron mining over the cycle. The build-up during the boom in mining production will prove to be profitable as business demand for iron is increasing in other stages of production. But when interest rates rise and the bust ensues, the demand for iron in the other stages declines, but the cost structure of the built-up mining production remains at boom-levels until the collapse of asset prices. Then the collapse of prices of assets used in mining will make their production less profitable and so on. As the liquidation and re-allocation process proceeds, the capital structure is shorten to once again satisfy people’s time preferences.