[Jthomp76]

Why do we believe that capital investment comes only from savings and not from printed money? Can’t I start a business or invest in new capital equipment with printed dollars that I borrowed? Why can’t capital investment come from money printing/fractional reserve baking system?

[jmherbener]

Monetary inflation and credit expansion change the lines of capital investment but not the overall amount of resources devoted to building the capital stock. They divert capital investment into lengthening the capital structure of the economy by expanding investment in the higher stages relative to lower stages. So, yes, some particular entrepreneur may have his project funded because of monetary inflation and credit expansion, but for the economy as a whole no additional resources are moved into building up the capital stock. There is no shift of resources overall into capital buildup because monetary inflation and credit expansion leave the demand for consumer goods and the lowest stage capital goods intact. In fact, the demand for consumer goods may increase as people’s wealth rises from the asset price inflation, e.g., the stock market boom, the housing bubble, etc. set in motion by monetary inflation and credit expansion. The boom that results from monetary inflation and credit expansion is therefore characterized by over-consumption and mal-investment.

Take a look at Joe Salerno’s article:

https://mises.org/sites/default/files/qjae15_1_1.pdf

[Jthomp76]

But during an artificial boom, do we not see firms investing in capital equipment and consumer snatching up goods produced by this equipment?

[jmherbener]

Of course, but in analyzing social processes one must conceive, as Frederic Bastiat stressed, both the seen and the unseen. If we look only at the seen, then every government subsidy can be justified by the output stimulated by the subsidy regardless of the greater value of the goods not produced by the same resources.

http://www.econlib.org/library/Bastiat/basEss1.html

Consider Mises’s metaphor of the master builder. He argues that monetary inflation and credit expansion leads entrepreneurs as a group, like a master builder, to begin to lay a foundation for a building (i.e., the capital structure of the economy) that is much too large to complete given the resources he has. Of course, as construction begins, one could see that resources are shifted into the laying of the foundation. But the alternative uses of those resources in constructing a building with a smaller foundation are not seen since they are not undertaken. Only when the master builder comes to realize that he lacks the resources necessary to complete the larger building that he began to construct does he see that he malinvested his resources by laying to big a foundation.

https://mises.org/library/malinvestment-not-overinvestment-causes-booms

[Jthomp76]

But literally speaking, do we see a lot of incomplete buildings during an artificial boom? How do we actually see what you’re describing play out?

[jmherbener]

In the latest housing boom, there were unfinished houses and housing developments left to decay during the bust. But malinvestments mean too much of some things have been produced to satisfy demand for them and too little of other things to satisfy demand for them. For example, there would be new logging roads left unused, lumber mills with excess capacity, empty office space, and so on. The evidence is revealed in the liquidation process of the bust.

There are entire uninhabited cities in China.

http://realestate.aol.com/blog/2013/03/05/china-empty-cities-photos/

[Jthomp76]

Wow!! On the other hand, is there not at least some benefit to the Chinese people in this example, that there are now more existing homes and people can eventually move out of the rice paddies and into the city? There are now more homes than there were before.

[allanxwheeler]

But literally speaking, do we see a lot of incomplete buildings during an artificial boom? How do we actually see what you’re describing play out?

Dr. Herbener can correct me if I am wrong, but many projects are finished during the boom. It is the bust that reveals the errors. The experience of unfinished housing projects were especially evident in my hometown. During the housing boom, it was a race between a few cities for the title of “fastest growing city in the U.S.” The post-crash impact of the crash left housing developments with foundation-only and partially built homes. Gated communities were left with blocks of undeveloped land. It was and is an especially odd site to see.

[Jthomp76]

That is helpful, thank you!

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