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There is a separate problem with investing to improve production in a falling-rate environment. Let’s look at an example. Ostrich farmer Argg the 107th (descendant of the original Argg) borrows money at 6% to build a larger barn and other facilities for ostrich farming. He is making a profit, and all the while the central bank is forcing down the rate of interest. His competitor, Orr the 106th borrows money at 3% to build an even bigger ostrich ranch.
Orr can either buy more ostrich capacity than Argg for the same monthly payment, or else he can build the same capacity for a lower payment. Either way, he has a permanent structural advantage compared to Argg. First, industry was burned down by rising rates. Now industry is ploughed under by falling rates. That the fall in rates leaves in its wake newly created industry (with ever higher debt ratios) misses the point. These temporarily profitable new businesses, loaded up with debt, are not healthy in the same way that a credit-expansionary boom is not a healthy economy.
Falling rates not only encourage more borrowing, but encourage and even demand that one repay the previous borrowing with new borrowing. This is called “rolling the loan.” After some period of time of increasing and increasing one’s borrowing, and never repaying anything, a business’ balance sheet (or a bank’s) becomes weaker and weaker and weaker.