Era of cheap Capital is here. What are the implication?
Capital is cheap, and we get capital with the least cost. Interest is at an all-time low. Governments are printing money on a whim as if there is no tomorrow. They are in the sweet spot of printing money and getting away with it. Classical economics says that printing money in excess will adversely impact the economy and spur up inflation. However, we are seeing another way round. We no longer see any inflation; even in the developing world, the inflation is very low, the impact is low, and not a political hot button issue. It used to be when any upward spike of prices would have a serious repercussion, leading to government change. However, we do not see the trends anymore.
Now that the capital is cheap let see how this will impact us all
Hidden Price rise
This is one of the anomalies in economics 101, the printing of money accelerates inflation. However, in today’s world, it is no more the case. We don’t see any substantial price rise for essential items.
The parameter from which the Inflation numbers are derived is heavily inclined towards essential day-to-day items. Our supply chains are so robust that the cost of day-to-day essentials is kept low. It doesn’t fluctuate much. We don’t see the cost of products like vegetables and groceries going up substantially. The decades of investment and technology have gone into these supply-side and made sure the supply chain is well-tuned. Having more money at the hands of the people doesn’t translate into a commodity prices hike.
The inflation tracker is no longer a clear indicator of price rise, especially for a typical middle and upper-income family.
If you want to see the effect of price rise, you need to see the cost of non-essential items like housing, services, automobile and travel, and leisure. The price has gone up the roof.
Cheap money is chasing the real estate market, and the big corporation is converting their capital into a rent-seeking business. They buy houses in the prime location and convert all their cheap capital into rent.
There is a mad scramble to chase the stock market, and we are seeing a mind-blowing valuation number for Tesla and Apple. People are throwing the money after any asset class that is thrown at them.
Even big companies have little idea where to put the money and they buyback of their shares. This creates an artificial bubble that we all live in.
Raise of cryptocurrency
People no more believe the government-controlled securities. They go behind novel ideas like cryptocurrency. Cryptocurrencies like BitCoin have seen ups and downs and reached a level of maturation and resilience. Faith in traditional currencies is eroding. People started allocating a certain portion of their investment to cryptocurrencies.