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In May of 2012 Chris Ferreira wrote:  

In May of 2012 Chris Ferreira wrote:  

{{cquote|If, however, central banks intervene in the market to suppress interest rates to pump an artificial stimulus into the markets, this provides the illusion to entrepreneurs that there is real excess savings in banks that would supposedly account for a longer term vision and increase of demand for capital goods.

{{cquote|When the majority of people are depositing their savings into banks and contributing to a high savings rate for their country, this creates an environment of higher levels of cash reserves in banks: in other words,  a nation of savers creates a situation where banks have enough capital to lend for new business ventures. As part of normal supply and demand characteristics in a free-market, lower interest rates will be adjusted to loan out this extra savings in deposits. In this case, interest rates fall in order to provide incentives to loan out money. In turn, the investment horizon for this capital is longer term and is primarily used to finance capital projects (“high orders”) and away from producing consumer goods (“low orders”). When all the excess savings in the bank are loaned out, the banks are operating at their minimum reserve requirements; interest rates then naturally increase to account for the shortage of savings in deposits, since the excess supply of money has been exhausted though loans...

 

If, however, central banks intervene in the market to suppress interest rates to pump an artificial stimulus into the markets, this provides the illusion to entrepreneurs that there is real excess savings in banks that would supposedly account for a longer term vision and increase of demand for capital goods.

This is a fallacy. Entrepreneurs in this scenario are lead into making malinvestments, for when the suppressed interest rates are allowed to increase to their normal levels, the malinvestments fail. The longer the suppression of interest rates, the more malinvestments are created and the more systemic damage it will create in any given economy when interest rates return to normal (and corrections are inevitable).

This is a fallacy. Entrepreneurs in this scenario are lead into making malinvestments, for when the suppressed interest rates are allowed to increase to their normal levels, the malinvestments fail. The longer the suppression of interest rates, the more malinvestments are created and the more systemic damage it will create in any given economy when interest rates return to normal (and corrections are inevitable).