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July 31, 2023
What’s The Cost Of Capital Right Now?
As a business owner, you must learn the concepts that move the economy, like monetary supply, interest rates, inflation, and lending rates. These are vital factors that can make or break your business. With this knowledge, you can make smart choices to keep things running smoothly.
Let’s get you informed and in control!
Time passes, and the federal government prints more and more money. In the last couple of decades, the US government had reduced our dollar treasury rates to a near zero interest rate environment, and then because of Covid printed even more money! This kept money flowing into the economy and kept the lights on for lack of a better explanation.
This caused massive inflation, and the purchasing power of the dollar dropped! Right now, interest rates are on the rise! Quite literally 2x the rate it was last year this time. The federal government does this to cut back on the circulating supply of cash after tripling the US balance sheet. You need to know the impact of what monetary policy can do on your purchasing power and realize what money costs right now!
What does rising interest rates mean?
It means cash is becoming more valuable after a massive drop in value. Money now might be worth more than a couple of months from now. Does this mean it will always be going up in value? No. Unless the federal government continues with 5% interest rates and keeps it there forever, this won’t stay. As we know, federal spending and business will continue as normal. At this exact moment, be ready for higher prices of goods and services even though cash will be expensive. As money is slowly eliminated from the balance sheet, prices will stabilize and drop slightly until it finds a new normal. It might be the time to leverage someone else’s money and get ahead of this opportunity.
The Economics:
Monetary supply refers to the amount of money circulating in an economy and the central banks typically control it. The monetary supply directly impacts interest rates, as central banks can influence rates by increasing or decreasing the money supply. When it is increased, interest rates tend to fall as more money is available to lend. On the other hand, when the money supply is decreased, interest rates tend to rise, making it harder for businesses to access credit.
Interest rates are the cost of borrowing money and are set by central banks in response to the economic conditions. Low-interest rates tend to stimulate borrowing, investment, and economic growth, while high-interest rates constrain growth by making it more expensive for businesses to borrow money. Companies must pay close attention to interest rates and their borrowing capacity, which can vary depending on the loan terms and the level of collateral put up by the business.
Inflation is the rate at which the purchasing power of a currency decreases over time. High inflation deteriorates the value of money, making it less effective as a means of exchange. Businesses must factor in inflation when setting prices for goods and services and negotiating business contracts. Inflation can also affect interest rates, making it harder for companies to secure favorable lending terms and increasing the cost of borrowing.
Lending rates refer to the rates at which financial institutions lend money to businesses. Financial institutions set lending rates based on the risk of default, the demand for credit, and the economy’s overall health. Companies must have good credit scores, solid financials, and appropriate collateral to secure favorable lending rates. In some cases, businesses may have to pay higher lending rates due to market conditions, which can increase business costs.
In summary, understanding monetary supply, interest rates, inflation, and lending rates is essential for any business owner looking to manage their finances successfully. By closely monitoring these factors, businesses can make informed decisions about when to borrow money, how much to borrow, and at what rates. Business owners must also understand the interconnectivity of these factors and how they can work together to either support or constrain economic growth. By taking time to evaluate these factors, businesses can be positioned to thrive in a dynamic and ever-changing economic landscape.
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