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To: Ilaine who wrote (325)	6/9/2001 7:36:51 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 443

CB - 1. Expansion of credit - by which I assume you are using shorthand to refer to misallocation of resources into production? I find this argument conceptually difficult to reconcile with Schumpeter's concept of creative destruction - you yourself argued recently that even when resources are not misallocated, they can still be rendered obsolete by new technology, if I understood you correctly. So it's sort of post hoc ergo propter hoc to blame misallocation on cheap credit, I think. Misallocation happens all the time due to creative destruction.... These are two different things. 1. Advances in technology and production methods are continuing all the time. The corresponding increases in productivity drive the less efficient producer out of business and destroy his physical capital. Unless the government is virtually destroying the economy and the profit motive, this will keep going on. 2. The normal rate of interest is a signal to business as to how much consumers prefer current consumption to future consumption. The interest rate is how much future consumption is discounted relative to current consumption. The amount of savings that consumers make available for borrowing is also normally related inversely to the interest rate. When business sees both low interest rates and high credit availability, it would normally be a signal that consumers wish to save more for future consumption as opposed to current consumption and therefore business would tend to invest in longer production cycle investments. When the government artificially lowers interest rates and increases credit availability, business will fail to produce enough products for current consumption and will invest too much in production equipment for future products. Regards, Don Misallocation - I use this only in hindsight for any investment that effectively fails, normally because the products that are produced are either not the ones or the quantity that consumers actually wanted. It occurs to some degree every day, but is normally spread out over the entire economy. It is actually a natural selection process where the successful entrepreneurs are rewarded and allowed to play again. The losers are left without the capital to fail again. When the government depresses the interest rate and artificially boosts credit availability, the entrepreneurs are fooled as to what consumers actually want. Even worse, this simultaneously occurs over most or all segments of the economy.