In my note against Cassandras who expect interest rates to rise to much higher levels, I have argued that because of the massive debt load of businesses, higher interest rates cannot be sustained for long because they reduce investment activity too much and thus lead to a rapid decline in GDP growth.
I am puzzled by the logic. In a simple model with all borrowing by non-financial companies and all lending by financial institutions, the higher cost is offset by the higher return. Those bankers simply recycle the extra margin back into the economy.
Separately, assuming that all the increase in rates are due to inflation [I know a big assumption here too], this would be effectively a pass-through as prices rise across the economy. Again, simplifying by ignoring the relative flexibility of various sectors to adjust pricing [however, noting recent research that seems to imply the assumption of 'sticky prices' may be overplayed].
If rates are rising solely, ore even partly, from real factors this would coincide with higher real returns and not be a particular issue for the overall economy either.
I understand that any single enterprise may be adversely affected by higher rates but he overall economy should be fairly neutral [leaving out the obvious simplifications in the above].
I am puzzled by the logic. In a simple model with all borrowing by non-financial companies and all lending by financial institutions, the higher cost is offset by the higher return. Those bankers simply recycle the extra margin back into the economy.
Separately, assuming that all the increase in rates are due to inflation [I know a big assumption here too], this would be effectively a pass-through as prices rise across the economy. Again, simplifying by ignoring the relative flexibility of various sectors to adjust pricing [however, noting recent research that seems to imply the assumption of 'sticky prices' may be overplayed].
If rates are rising solely, ore even partly, from real factors this would coincide with higher real returns and not be a particular issue for the overall economy either.
I understand that any single enterprise may be adversely affected by higher rates but he overall economy should be fairly neutral [leaving out the obvious simplifications in the above].