One of the strangest phenomenon for many people was watching various asset prices break new records while the world grappled with a global pandemic. How on earth could these assets be worth more now, than they were in 2019, given the economic carnage we suffered in 2020?
While there are many different reasons for this, and I do not claim this is the only reason, interest rates are surely to blame.
You see, when the economy stalls, governments around the world slash their interest rates in an attempt to get their citizens and businesses to borrow more money to either invest or spend. Let’s look at an example:
If you owned a local restaurant and you were looking to purchase new tables and chairs for your restaurant, maybe you could only get a loan at 9% to finance this. When you sit down and do the math, borrowing the money at 9% doesn’t end up being a profitable option for you as the expected increase in customer spending doesn’t offset the 9% interest rate. Now, if the government comes along and slashes interest rates to stimulate the economy, maybe now you can borrow at 4%. For some people, this shift in interest rates means that what was once a risky or non profitable option, has become less risky and more profitable.