Heterogeneous agents and leverage cycles.

Lot of discussion on the topic, and references to come, But here is my take:

What should happen to the yield curve when the economy finds business opportunities that yield major gains over six years? In a homogeneous environment, agents would allocate most of their investment at the six year point, the yield curve would peak at 6 year term and decline at 20-30 year term.

In a heterogeneous environment, some agents continue to invest in housing, say, rather then the 6 year opportunity. However, finance cannot suffer a interest loss on 20 year housing investment when the real gains are at 6 years. Hence, long term investments suffer with higher interest costs due to the pull effect.

Steve Keen and Mish talk about Credit money, Kling talks about profits leading us. Both these viewpoints dismiss the multiplier effect of "fractional reserve" lending. Thoma has more on the subject, referencing this paper.

In QM Theory, using our queuing model for production we call this supply chain interference. For example, restructuring to solve the energy crisis result in shorter supply chains for energy but the longer supply chain for housing does not match. Finance has to intermediate between the two, finance expenses go way up.