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For the case of the seeds, it makes sense that you can borrow short-term for the initial seed purchase, plant it and pay off the debt using a separate revenue stream before the seed ever produces a marketable product. This doesn't hold for most actual long-term investments, where there needs to be a continuous stream of costs, not just the initial
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" there’s actually no evidence that this is the case" So I guess we recently didn't get a glut of houses, and correspondingly a glut of businesses and capital goods created to help produce houses? I guess skyscraper theory is just a phenomenon. Perhaps what's confusing them is that short-term interest rates fall too. But that
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Yes, "the" interest rate is simply of an average of many interest rates, which are simply prices accepted by borrowers and lenders. If the demand for borrowed capital rises while the supply remains the same, the price should go up. So yes, interest rates are determined by both borrowers and lenders and capital is subject to the laws of supply
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"Consumption in this sense just means spending? If I take out a loan to spend on a personal house or a long-term business project, I'm expressing a preference for consumption in either case?" No sir. A consumption good is one that is used to directly satisfy a human want. Consumer spending is spending on consumer goods. In contrast, a
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I think you're trying to put my example into the wrong paradigm. Yes, houses and coffee cups need higher-order capital to be more efficiently produced. Yes, if there is less demand for housing and more for coffee cups, then you'll see the shift. The reason there is a cyclic activity here is that when the interest rate is lowered via credit expansion
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In the second of last paragraph there, I mean 6%, not 4% for the interest rate. I can't edit my post with the backwards-a$$ browser I have...just wanted to point out I'm not changing the numbers. I also want to point out not to compare business cycles to depressions like the Great Depression and the current one. In a normal business cycle, unemployment
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Well we might as well talk about commercial real estate, and for that matter residential. Let's start with the latter. Although residential real estate is a consumer good, it is durable good financed over a long period of time. Lower interest rates make these goods seemingly more affordable. Demand for housing goes up. More labor and resources are
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"The second proposition is that there aren't actually enough resources for this project. So what does that mean in practice? That there aren't enough laborers for the project? Wouldn't the business know this as soon as it goes to hire the laborers? Do the laborers drop off after a couple years for some reason I'm not aware of? Or
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yes, what's interesting about it is that the money aspect of the capital is created out of thin air, so there cannot be a supply shortage of money in theory. the problem is that this money affords less and less real resources that cannot be willed into existence. when long-term investments start, they pull in labor from other areas in the production
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also, keep in mind the only time money is "injected" into the stock market is during an IPO. none of the money traded daily between a seller of stock and a buyer goes directly into increasing the length of the production process. This is where corporate bonds are much more important, and they rely on interest rates. as far as 100% reserves