Comments by "k98killer" (@k98killer) on "" video.
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The gratuitous nature of bank credit is limited first by the customer base of each bank, second by the interbank clearing capacity, third by the operating expenses of each bank, and then finally and eventually by the compressed profit margins of lengthened processes of production. However, unlike Mises and Boehm-Bawerk, in my view, a simple supply-and-demand analysis is sufficient and persuasive to demonstrate the problem:
1. By lowering the money rate of interest below the natural rate of interest through fiduciary media issuance, banks induce capital investment and production lengthening.
2. The additional capital goods represent more future goods, raising the ratio between future goods and present goods, which induces an inverse movement in the price ratio.
3. The relatively higher supply of future goods compared to present goods has the effect of lowering the price of future goods, thereby compressing profit margins for the lengthened process of production.
4. At some point the lengthened process becomes strictly unprofitable.
5. The net effect is then a consumption of capital through the depletion of the subsistence fund, and the eventual result is a recognition of the issue through a deflationary bust as the profit needed to repay loans fails to materialize.
In a world without bank credit creation, the effect of additional accumulated capital would cause greater discounting of future goods through the raising of the ratio (and thus lowering of the price ratio) between future goods and present goods, which somewhat paradoxically increases the natural rate of interest. This then discourages further capital investment because the profit margins of newly lengthened production processes will fall until they intersect this interest rate. Again, a simple supply-and-demand marginal analysis is sufficient to elucidate this. The notion that capital investment has a compressing margin of increased productivity is an unnecessary further assumption in my view.
Antal Fekete described in a lecture that a falling interest rate increases the liquidation costs of liabilities, raising the costs of existing capital relative to new capital. Accounting standards rarely account for this effect, and modern accounting does not even require banks to account for mark-to-market losses on their HTM assets, leading to distortions in economic calculation. I have heard many people talking in recent years about how a mortgage locked in at a low rate is an "asset", and this is a similar phenomenon but with the opposite effect (driven by decreasing purchasing power in the unit of account and thus larger money flows). In this way, an increase in the prevailing market interest rate affects the distribution of property by moving it toward those with fixed rate liabilities and away from those with fixed rate assets, and similarly a decrease in the interest rate affects it in the inverse direction. This partially plugs the theoretical gap left in Mises' explanation of the effect of changes in interest rates upon the distribution of property.
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