[miljacic]

… before prof. Herbener or anyone else replies, since the questions do not seem hard to answer (I think)…

Mr. Josh, if you are an oil company and funds are not saved first, then you should quit your job until more funds are made. If there are no savings in the system (it’s very poor), and so interest is naturally high, you should be doing something else not drill oil, maybe bake bread. If, now, rates get artificially lowered by, effectively, printing money, you will be able to snatch the funds from more currently important tasks (baking bread) into drilling oil.. and that’s bad at this very moment when the system is so poor.. people need bread not oil. The high interest is telling you to feed the people first, not their cars.

A moron who wants to borrow money to build a tanning salon in a tropical climate.. will never get that money from anyone with common sense. But let’s assume he does get it somehow (by being very charming, let’s say, Elvis Presley incarnate). If interest rate is naturally low, then the system is rich, everything is plentiful, so if that money is lost, no big deal. If, however, interest rates are artificially low, the system is poor, people are struggling to survive, and that lost money is a great loss indeed.

Why did (artificial) low interest rates only stimulate home construction and deficit spending, and not the building of factories, oil wells and other more useful things? Because, then, no one knows what is “more useful”. The system is pumped with new money and whoever gets it first will do with it whatever he/she wants without being (quite soon) penalized if the usage is not very efficient one. And what would be really efficient? No one knows because the interest rate is false and conveys no information about reality. Then, also, government may step in and, in various ways, direct this new money into some specific areas, like with “everyone needs to buy a house”. .. then in this areas things bubble up and you get a bubble. But even if the government does not direct things, this new money will gather spontaneously into some random puddles of activity and form the bubble there.

Answers to the rest of the questions go are along these same lines.