The Reality Of Interest Rates
Most people look at interest rates backwards. They believe cheaper interest rates leads to more lending. Hence the notion that higher interest rates lead to economic pullback.
In this video I discuss how it is the prospects of the economy which determine whether borrowing is undertaken. The key is whether a return is available. If one is going to make75%, then a 25% rate is a done deal. If however, there is no money to be made, a 1% loan is too expensive.
▶️ 3Speak
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As you explained, the interest rates do not matter to a large extent when there is a better opportunity for people to create cash flow that has a higher ROI that can easily compensate for the interest paid in the debt. It really requires a high level of financial literacy to be realized ✌🏼
Fact, but the odds of earning on investment or loan is bigger when interest rates are lower. That’s just a mathematical certainty
I believe that when you ask for a loan you do not have or do not want to risk your capital, therefore the lender must set the fair terms so that they can obtain a profit, even if it is little
Even when the banks would carry zero risk, they only took the loans that would benefit themselves. So they will always be chasing money and I just believe that the banks are not that optimistic about the current economy.
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Summary:
In this episode, the speaker delves into the concept of interest rates, debunking common misconceptions surrounding their influence on borrowing and economic growth. He explains that low interest rates are not necessarily indicative of economic expansion but rather a reflection of low money supply. The speaker emphasizes that the ability to make money ultimately drives investment decisions, not just the cost of borrowing. Additionally, he discusses the impact of interest rates on bank lending behaviors post the financial crisis. The episode concludes with a discussion on the current state of the yield curve and its implications for economic growth and borrowing trends.
Detailed Article:
The speaker begins by addressing the common misconception that low interest rates stimulate borrowing and economic growth. He points out that the traditional belief that interest rates must be lower for people to borrow is flawed. Instead, he argues that low interest rates actually signal a low money supply, while high interest rates indicate a high money supply. This perspective suggests that the fundamental driver of investment decisions should be the potential for profitability rather than the current interest rate environment.
Furthermore, the speaker highlights the role of commercial banks, such as Chase, Wells Fargo, and Bank of America, in creating money by lending. He stresses that businesses should base their borrowing decisions on the potential return on investment (ROI) rather than the interest rate alone. This perspective shifts the focus from interest rates to the profitability of ventures when considering borrowing for expansion or investment.
The speaker also examines the impact of Dodd-Frank regulations on bank lending practices post the financial crisis. He mentions that low interest rates and increased lending costs due to regulations have constrained bank lending, despite the economy's need for money. This observation underscores the complexity of factors influencing bank lending decisions beyond just interest rates.
Moreover, the speaker analyzes the current state of the yield curve, indicating a potential inversion and its significance for economic growth expectations. The discussion surrounding the flattening yield curve and its implications for borrowing decisions reflects a nuanced understanding of economic indicators and their impact on market dynamics.
In conclusion, the speaker argues that interest rates are not the sole driver of economic growth and borrowing trends. He highlights the importance of assessing profitability and economic prospects when making investment decisions, rather than solely focusing on interest rates. The episode provides valuable insights into the intricacies of the financial system and the factors affecting borrowing, lending, and economic growth in the current landscape.