Industrial Insight

financial crisis with no improvement… | September 17, 2012

In 1935 Friedrich A. Hayek presented the following diagram of the productive stages of an economy’s production.

A voluntary decrease in consumption and commensurate increase in savings lowers the slope of the hypotenuse, thus the real rate of interest. The combination of lower interest rates and increased savings offers an environment conducive to increased investment in earlier stage production. The investment will increase productivity and pave the way for higher levels of future consumption.

What has occurred in our country for the past decade would be the exact opposite. Resources allocated to fighting a foreign war, purchasing goods from abroad and dumping savings into real estate are increases in current consumption. This increased allocation to later stage goods, causes the triangle to become taller and fatter. The slope of the hypotenuse increases, interest rates rise and there is less investment going into productive resources.

And, I might add, we borrowed the money to effect the above scenario.


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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.







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