Posted by: jhamon | June 9, 2009

Malinvestment Defined

Malinvestment: 'W'

Malinvestment: 'W'

[Pointy-Head AlertMalinvestment is a principle developed long ago by the Austrian School of Economics. 

From David Z: “Malinvestment is the systematic allocation of productive factors (i.e., land, labor, capital) towards the production of goods or services for which insufficient demand exists.”

 

Moreover, malinvestment is a result of inflation which (according to the Austrians) is not a price phenomenon, but a monetary one.

When money is created out of thin air, inflation is the inevitable side-effect. Of this, there is no uncertainty. There is no such thing as “core” inflation; either money is being created (which causes inflation) or it is not.

To sum up: overly easy credit emboldens people to make poor investment choices.  The resulting deflation (radical repricing) ‘cures’ the mispricing of assets.  Case in point, from today’s San Diego Union-Tribune:

“I would anticipate a number of scenarios similar to the W that will play out over the next six to 12 months,” said Jeff Higley, a vice president with Smith Travel Research. “There’s just no funding mechanism available for companies to refinance these things, and values have dropped dramatically, so it makes sense for companies to walk away instead of salvaging their property.

“Most people in the hotel industry are expecting a fire sale on distressed assets that in some cases are 30, 40, 50 percent of the original value.”

 

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  1. […] Alley Insider has previously reported on just how weak MySpace really is.  I have previously blogged about the Austrian Economists’ notion of malinvestment.  It’s nothing that a good […]


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