Discussing inventory problems and economic order quantity with a client today. Things like the classic “Newsvendor Problem” (sometimes called the “paperboy problem”). Immediately after, just starting reading an econ piece on stimulus effects, and whether they are systemic, specific or some of both. i.e. If we assume at least that there are some problems with fiscal or monetary stimulus, are those problems system wide (price inflation), or structural (everyone decides to invest in horseshoes instead of computers).
Largely because of the types of inventory problems (by which I mean challenges to be solved, not “problems” in the sense of inherent obstacles) we have discussed, stimulus and low interest rates lead to mal-investment (poor capital decisions). i.e. Inventory problems only exist because of inherent metaphysical constraints. There is not an infinite warehouse or floor-space (space constraints), you cannot have all the future supply of baked beans moved to today (temporal distribution problems).
These concepts of inventory, stimulus, and mal-investment are inextricably linked. You can’t do everything (resource problem), and you can’t do everything now (temporal distribution problem). The most attractive capital uses are the lowest hanging fruit. Owners or lenders of capital must decide “Do we invest in picking peaches, sewing jackets, or building green-friendly batteries?” These decisions are based on which projects are assumed to be declining (gas street lamps) and which are increasing (software); on which have high profit or low profit returns; and the cost of borrowing funds versus the return from loaning funds. Capital decision makers will make decisions on the lowest hanging fruit at whatever the given expected interest rates and expected pay-offs are. Risky projects will be foregone, in order to begin with those projects predicted to have better pay-off and/or more certainty.
Introduction of more readily available funds and lower interest rates for borrowing can only mean reaching deeper into the barrel to grab dodgier projects that didn’t previously pass muster (or they would already be underway). Incentives away from savings hurt once, robbing capital for future projects. But they also hurt a second way, because they can only inevitably lead to increasingly higher risk, and/or lower pay-off projects.