The cost of borrowing money / by kevin murray

The cost of borrowing money for those of even the shakiest credit ratings, corporate or personal, has been at historic lows, but beginning in December, 2015, the Federal Reserve, began its process of raising interest rates, or the cost of borrowing money, in a Fed policy that is determined to normalize interest rates to something closer to historical norms within America, of which, states that the Federal Reserve rate: "…averaged 5.72 percent from 1971 until 2018."  As might be expected, should the Fed come even close to reaching the 5.72 percent rate, there will be a seismic shift in not only what institutions and other investors will invest their money into, but also, in the cost of borrowing money.  In short, the last decade, has been an outlier for borrowers, in which their cost of money has been very low, as well as an outlier for savers, which have not been able to get much of a positive interest rate return in regards to short term instruments, such as money market funds, and short duration CDs.


America, itself, has a national debt that is already at historic levels and is headed even higher, so that the service of that debt, will take up an even larger portion of the budget of the United States, each year, as interest rates, increase.  In addition, corporations of all sizes and sorts, borrow money in order to augment their growth and to purchase goods as well as to expand their business, so when their costs go up, not too surprisingly, they are going to feel the squeeze of having to devote more capital to the service of their debt.  Finally, consumers of all stripes, but especially those that are just getting by or trying to get by will suffer even more from even higher interest rates than what they are already paying, so that their borrowing costs in aggregate, will take even more money that they don’t really have in the first place, from their pockets.


It doesn't take an economic genius to understand, that when the cost of borrowing money goes up, that businesses and individuals that are already struggling, are going to find that their struggle gets appreciably worse; in addition, those that invest in the lowest investment grade corporate bonds, will discover, that the return on their investment no longer matches up well with their risk, so they will need a substantially better interest rate in return for such risk, or they will reduce their risk by investing in a higher grade investment corporate bond that now provides a higher return than what it previously did.  As for those financial institutions that bankroll individuals, such as through credit cards, car loans, and student loans, they will find that as their default rate goes up, that they will tighten down the hatches, reduce such loans, and increase their fees, penalties and interest rates in an attempt to maintain their profits.


In short, for all those corporations, businesses, and individuals, that are just barely treading water when interest rates were at historic lows, now they will have to face the music, and therefore pay back what they have had loaned to them at a substantially higher rate, in which, that won't end well; it won't end well at all.