![]() So, we may see big companies in capital intensive industries look for opportunities in capital light sectors. When money is expensive, companies that are less capital intensive (companies requiring less money to operate and grow) perform better because they need less of that expensive capital. Companies are focusing resources on their safest bets toward profitability and long-term survival. That’s why you are hearing about all these layoffs among startups. That puts pressure on them to switch from a growth to profit mentality. This means that startups have a harder time raising money. When money is expensive, there is less VC money. If the cost of money is raised by a couple of percentage points that can be a difference between a profitable and loss-making project. When money is expensive, fewer projects make financial sense. How does the cost of money affect companies? So, when a central bank raises interest rates to just 1.5% (as of the end of July 2022) everyone freaks out.ģ. And the business world got addicted to this cheap money. But as you can see in the graph below, we had a prolonged period of very cheap money since 2008. What are average interest rates? Where are we now?įED’s interest rate has averaged around 5.5% from 1970 to 2022 with a record low of 0.25% in 2008 and a record high of almost 20% in 1980. ![]() When money becomes more expensive, fewer people and companies spend it, which cools down the demand for goods and hence helps slow down inflation. And what can we do to fight inflation? Raise interest rates. However, this created another problem that we are dealing with right now. To make money more appealing, banks lowered the interest rate and people started spending again, which helped recover the economy. ![]() We all stayed at home and nobody was spending money so the demand for money was low. So, if you think back to the beginning of the COVID pandemic outbreak. They lower interest rates to help recover the economy in crises and they raise it in prosperous times to keep inflation in the desired 1–2% range. They are one of the most powerful tools economists have to help navigate business cycles. For example, if we take out a 1-year loan of $10,000 and our interest rate is 10%, we will have to pay back $11,000 after 12 months.īut interest rates are not just money’s price. When we talk about the price of money, we actually talk about the interest rate, which is the amount we have to pay to borrow money. So, let’s look at what is the price of money and how that’s relevant to the work of designers. ![]() Well, it affects your personal life and professional life. But how can money be expensive?Īnd even if it is getting more expensive, why should I care? Recently, you may have heard that money is getting more expensive. ![]()
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