Whats the deal with Bryan Caplan? In “Why I am not an Austrian Economist”, he writes:
“What I deny is that the artificially stimulated investments have any tendency to become malinvestments. Supposedly, since the central bank’s inflation cannot continue indefinitely, it is eventually necessary to let interest rates rise back to the natural rate, which then reveals the underlying unprofitability of the artificially stimulated investments. The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account.”
My gut reaction is that although they might try to, the real rate(s) is unknowable. Another thought I had was that by the time the interest rate is lowered the money has already entered the economy.
Credit expansion has disparate effects on the prices of capital goods throughout the capital structure. When the supply of credit is expanded by banks issuing fiduciary media, then interest rates will be below their levels on the unhampered market economy. Interest rates are not only on money borrowed under contract in loans, but rates of return on investment in production and rates of return on investment in capital capacity. When the credit expansion funds are borrowed, they are spent into particular lines of production, e.g., housing, automobiles, lumber mills, auto factories, and so on. In making production decisions, entrepreneurs must predict the net income and net worth of their investments in particular lines of production and particular lines of capital capacity. It’s not simply a matter of predicting interest rates. Moreover, even if savvy entrepreneurs avoid mal-investments, the money inflation and credit expansion have changed the actual conditions of demand and supply in credit markets. Loans will be extended, then, to less savvy entrepreneurs and less credit-worthy consumers. This makes malinvestments more likely, not less likely.