The price of the quality of correctly made economic decisions increases when the price money in the economy increases (increases interest rates). In conditions of cheap money, this is not so relevant, because their price does not affect the final result of the business as much. Everything that is eaten is easily replenished with a printing press or, in a smart way, with the addition of another portion of toxic loans (bonds, loans, etc.), which, in fact, after the transition from a cheap life to an expensive one, may not be refunded at all, which is the basis of any financial and economic crisis.
When interest rates rise, the cost of capital for enterprises increases significantly. This leads to the fact that companies evaluate their investment activities more carefully, since a more expensive loan requires greater repayment. They begin to ask questions about the feasibility of new projects, payback periods and necessary risks. In high-stakes conditions, there is a need for better assessment and analysis when making decisions, which can significantly reduce the likelihood of mistakes in the strategy.
At the opposite end of the spectrum, when interest rates are at a low level, as it was for many years after the financial crisis of 2008 companies can afford much riskier decisions and inefficient investments. Easy access to finance creates the illusion of well-being, where inefficient or even unprofitable companies can survive thanks to cheap loans. In such circumstances, separating a viable business from an unacceptable one becomes much more difficult, and as a result, this can lead to the accumulation of financial bubbles.
In addition, the constant low price of money can contribute to abuses in the lending sector. Financial institutions are starting to offer riskier products such as high-yield bonds and loans with high interest rates, which in turn create the risk of non-repayment. After the transition from "cheap life" to "expensive", many borrowers may not be able to cope with the increased heavy debt burden, which can trigger a chain of defaults and lead to a financial and economic crisis.
Reprinting money is certainly one of the strategies that is used in crisis situations, but this decision has its consequences. If the economy does not generate enough revenue to support debt levels, the long-term consequences can be extremely negative. This can lead to currency depreciation, increased inflation and even greater financial stress for the population and businesses.
Financial conditions are the main factor determining investment decisions in the economy. Large players in the market begin to manage their assets more responsibly when they observe an increase in interest rates, realizing that low rates are not a sustainable condition. An increase in the value of money can lead to significant changes not only in the corporate sector, but also in consumer spending, as households also begin to be overloaded with debt.
