Low interest rates have been a defining feature of the Monetary Wave, shaping the economic landscape over the past few decades. While these rates have been celebrated for spurring economic activity and fostering growth, they have also introduced significant risks that are often overlooked. The long-term impact of sustained low interest rates has profound implications for the economy and society, setting the stage for potential financial crises.

The Allure of Cheap Money

When interest rates are low, borrowing becomes cheaper, and the opportunity cost of taking on debt diminishes. This environment naturally encourages risk-taking, as businesses and individuals alike are more inclined to pursue investment opportunities that may have been deemed too risky in a higher-rate environment. The allure of cheap money drives a surge in speculative investments, often in already overheated sectors or emerging markets that promise high returns with significant risks.

The Rise of Unwise Investment Decisions

As borrowing costs decrease, the threshold for a viable investment also lowers. Projects that might not have made economic sense in a higher interest rate environment suddenly appear attractive. This can lead to a wave of unwise investment decisions, where capital is allocated to ventures with poor long-term prospects. These decisions are often driven by the belief that continued low interest rates will sustain these investments, even if their underlying fundamentals are weak.

The Prominence of Leverage

Low interest rates also promote the greater use of leverage as businesses and individuals seek to maximize returns on investment. Leverage amplifies gains in a rising market but magnifies losses when the market turns. The widespread use of leverage during the Monetary Wave has increased the fragility of the financial system. The system becomes more vulnerable to shocks when too much debt is piled onto investments with shaky foundations.

Social Cycles and Optimistic Behavior

From a social cycle perspective, low interest rates have induced overly optimistic behaviour among investors and policymakers. This optimism is rooted in the belief that the good times will continue indefinitely, leading to a disregard for the potential risks that come with excessive borrowing and risk-taking. This behaviour lays the groundwork for the next financial crisis, as it encourages complacency and a lack of preparedness for economic downturns.

The Inevitable Correction

History has shown that periods of sustained low interest rates often lead to asset market bubbles. These bubbles are fueled by cheap money and the belief that the underlying assets will continue to appreciate. However, when the bubble bursts, the consequences can be severe. The financial system, already weakened by high leverage levels and unwise investments, struggles to absorb the shock, leading to widespread economic distress.