porphyrogenitusLet me clarify something, too; it’s not possible to know a priori what the malinvestments will be (as in the example). One often gets a variant of this reasoning from non-Austrians (not JNJ1987), to the effect that “if you guys believe entrepreneurs are so great at forecasting, why can’t they just incorporate the artificial interest rate into their calculations and adjust for it?”
Well, 1) a belief that good entrepreneurs will generally make superior forecasts is not a belief in their infallibility (standard macro “rational actor/rational choice model” style). Absent the market price, there is no way for entrepreneurs to know what the true interest rate would be.
2) we’re all trapped in a “collective action problem” – knowing the interest rate/money supply is being interfered with, people could make no new investments, since they cannot predict which ones will go belly up during the bust. But not making new investments does not affect people or firms from being affected by the bust. Especially since in the meantime competitors are taking advantage of the seemingly cheap credit, which will have market-distorting affects in the short run as well (to their advantage, and your potential & actual disadvantage if you forego it – without much long-term advantage, since you’ll still be affected, in ways you cannot predict in advance, by the general bust that follows any artificial boom). So the only reasonable choice is to make whatever investments you can with an eye towards avoiding the pitfalls as much as you can and hoping to shield yourself as much as possible. but it’s imperfect, which is why everyone would be better off avoiding this whole mechanism to begin with.