When people lower their time preferences, they save and invest a larger proportion of their incomes and consume a smaller proportion. Their reduced demand for consumer goods lower their prices, which reduces the demand entrepreneurs have for producer goods used to produce those consumer goods. Losses in these lower- stage production processes are balanced by profits in higher-stage production processes. With the additional investment funds, entrepreneurs will buy capital goods that prove profitable by satisfying the patterns of consumer demands that emerge in the future. Their additional demand bids up the prices of these capital goods making their production more profitable, which makes the production of higher-stage capital goods more profitable. The entire production structure of the economy lengthens in response to lower time preferences.
Monetary inflation and credit expansion increase the supply of credit and push down interest rates, but the proportion of saving-investing to income has not risen and the proportion of consumption to income has not fallen. Any lengthening of the production structure will prove to be malinvestment because people’s time preferences will not make it profitable in the future. Fed monetary policy causes an inter-temporal misallocation of resources.
The further the misallocation proceeds, the greater the divergence between the lengthened production structure and people’s time preferences. That’s why more monetary inflation and credit expansion cannot restore normalcy to the economy. The only way to do that is to adjust production processes to satisfy our preferences.