Significance of the End of Cheap Capital for Growth-Oriented Enterprises

WHAT IS THE SIGNIFICANCE OF THE END OF CHEAP CAPITAL FOR GROWTH-ORIENTED ENTERPRISES?
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Executive Summary
Since 1970 and the early 2000s, the world has been experiencing an era of cheap capital. During this period, most businesses flourished since the capital was cheaper and readily available. However, between 2002 and 2008, the world experienced the era of the end of cheap capital. One of the reasons that caused the end of this era was the economic weaknesses in the developing countries, the lack of application of outstanding monetary policies by the central bank to stimulate growth, and less demand for credit by the indebted households. Even though the condition seemed to stabilize between 2009 and 2002, the COVID-19 outbreak ended the second period of cheap capital. For example, China factory services were reduced in November 2022 due to increased COVID-19 cases (Kennedy, 2022). This reason has caused most growth-oriented enterprises to experience problems. For example, they are passing a long process to access loans than the way they were before. Furthermore, most investors are not ready to invest in the business since the risk and the cost is high. If this trend is managed, it will likely continue negatively affecting growth-oriented enterprises; measures should be taken to control it. Therefore, the government should collaborate with business leaders, policymakers, and investors to create an outstanding environment for this business to thrive.
Introduction
Over the years, there has been a discussion regarding the cheap capital. Some people have been highlighting that the era of cheap capital has finally ended, while others are disputing it, stating that we are still in that era. However, it is interesting that despite this intense topic, some people still do not understand what this era stands for. A low-interest rate credit or loan characterized the cheap capital era. Furthermore, this was when the central bank, such as the Federal Reserve, had set low-interest rates. In most instances, the cheap money was usually good for the borrowing individuals but hurt the investments such as money market funds, saving accounts, bonds, and CDs. Furthermore, cheap capital is likely to negatively impact the borrower since the borrower takes on excessive leverage if they cannot repay all the loans.
Background
The trend of cheap capital has a long history. For instance, since 1980, there has been a clear variation in the cost of capital in most countries which had come together as financial markets became global while the risk premiums existing in the developing countries fell drastically. Furthermore, there was plenty of capital, while the long-term interest rates were reduced drastically due to reduced investment in assets such as machinery and infrastructure. Furthermore, global investment also fell, causing a decline in the demand for capital at a higher rate than the supply growth the Asian current-account surpluses have created. Most people, therefore, blamed the "saving glut" as the main cause of the low-interest rates, which caused low global investment.
However, over the years, this trend has been reversing. For example, the rapid urbanization in Asia, Africa, and Latin America increased the demand for roads, power, water, factories, and housing. This trend has caused the global investment demand to increase considerably over the years, attaining levels that have not been witnessed since the postwar construction in Japan and Europe. Nevertheless, the global appetite is not likely to rise because of reasons such as China's plans to encourage domestic consumption (Forbes, 2011). Furthermore, the amount to save will reduce since spending increases as the population ages. Furthermore, expenditures have increased as money has been raised to deal with climate change. These reasons caused the world to enter an era with scarce capital, which has caused real long-term interest rates to increase. These rates are likely to limit the investment that could reduce the rate of global economic growth.
This era has also comprised tighter capital likely to have huge impacts. The governments are therefore anticipating higher costs of debts, which will prompt them to improve their different public finances. Furthermore, this trend has caused the risk of fiscal deficits due to the low-interest rates, which cannot easily be financed in the coming days, thereby increasing a higher degree of crowding out of private investment.
The application of restrained public finances has yet to solve the problem, which is prompting different governments to employ financial protectionism in insulating economies from capital costs that are increasing by a huge margin. The government is therefore trying to manage it by introducing new rules to stop the domestic pension funds and state-insured bans from lending or investing abroad or even directing their sovereign-wealth funds for creating domestic investments only. However, these moves have also negatively impacted the global economy. For example, the real interest rates have been diverging among countries causing the countries with large current-account deficits to suffer lower growth. Similarly, the savers in countries with surplus have been receiving lower returns.
Overview of the Topic
The topic of cheap capital is critical since it is about to end. For example, there have been instances where the world has been experiencing a high inflation rate. Moreover, the banks are making it stricter for businesses to borrow loans. Moreover, it has increased loan interest rates, making them costly for businesses (O'Connor & Scheid, 2022). Furthermore, since there is an increase in uncertainties, most people are not ready to invest. This topic is, therefore, critical since it affects growth-oriented businesses. Understanding this topic will help governments around the globe to know the measures that they can employ to manage it. Furthermore, the government will collaborate with other stakeholders to bring stability to the economy, thereby protecting these growth-oriented businesses.
Aims, objectives, and Research Questions
Since the era of cheap capital is ending, various transformations have happened worldwide. For example, this move has negatively affected most of the growth-oriented enterprises. If this trend is not controlled, these enterprises would likely continue being negatively affected, which could worsen the economy. The following are the aims that the following research is looking forward to attaining.
1 Individuals should be able to understand the major causes that are ending cheap capital.
2 To understand the impact of the era of cheap capital on the economy and growth-oriented enterprises.
3 To help understand the transformations that have happened that are helping to bring the end of cheap capital.
4 To comprehend the impact of the end of the era of cheap capital on different economies around the globe.
5 Measures that the governments can employ to help these growth-oriented enterprises to adapt to the end of the cheap capital era.
The following are the questions that will help to understand these objectives.
1 What are the reasons that led to the era of cheap capital?
2 Which period did the era of cheap capital last?
3 How did growth-oriented enterprises perform during the cheap capital era?
4 What causes affected the cheap capital era?
5 Measures that the governments employed to prevent the cheap capital era from ending?
6 How has the end of an era of cheap capital affected growth-oriented businesses?
7 Measures that the governments can employ to help growth-oriented enterprises to adapt to this era?
Analysis and Supported Arguments
Previously even though most people did not notice the cost of the capital reduced by a huge margin. One of the main causes of the decrease in the interest rates was the “global saving glut”, which results from an increase in the global supply of capital which is an excess of the demand being invested. Even though most people believed that the glut happened because of the rise of the global saving rate, this claim could not have attained this huge impact. For example, there was a reduction in the global household saving rate from the 1970s, which was believed to have played a critical role in shaping the cheap capital era.
This analysis shows that the saving glut has mainly resulted from the reduction in the demand for capital, as shown by the rate of global capital investment. For example, between 1970 and 2002, the world experienced a reduction in global investment since the share of the gross domestic product (GDP) reduced from 26.1% to 20.8% (Dobbs et al., 2010 10). Moreover, the global investment between 1980 and 2008 averaged $700 billion less annually than if the 1970s rate remained constant, which could have brought a cumulative sum of $20 trillion. To comprehend this reduction of this amount, it is approximately equal to the combined United States and Japanese GDP in 2008 and, on the other hand, more than the combined GDP of EU-27 in 2008. On the other hand, the $20 trillion is approximately four times the size of Asian account surpluses in 2010 and approximately five times the growth of money supply exceeding the GDP within this time.
The global investment rate declined happened rate declined because of varying reasons. The first reason is these investment rates had previously succeeded some decades after World War II. The main reason was Europe and Japan rebuilt the cities, roads, and factories (Dobbs and Spense, 2011 2). The other reason that prompted the global investment rate to decline was in the 1960s, the real growth of domestic product growth slowed, which decreased the need for new investment. Therefore, This trend strongly connects GDP growth and investment growth. Moreover, capital goods have also become cheaper than other goods and services due to rapid reduction in the quality-adjusted price...