The End of Cheap Money and the Risks Ahead

The Financial Times (FT) recently published an article examining how the end of the ultra-low interest rate era is affecting Corporate America.

The article argues that the era of cheap money is over and that many companies now face materially higher borrowing costs when refinancing debt. So far, the greatest pressure has been concentrated among lower-rated borrowers, particularly companies with weaker balance sheets and higher leverage. These firms are increasingly being forced to refinance debt at rates significantly above what they paid when money was abundant and inexpensive.

The article also notes that refinancing risk could spread more broadly under economic stress. If losses among lower-quality borrowers force investors to raise cash, selling pressure could potentially spill over into higher-quality credit markets. Nevertheless, the authors generally maintain that default risk across the broader economy should remain manageable, provided economic conditions do not deteriorate significantly.

How Cheap Money Changed Investment Decisions

In my view, the most important aspect of the article is not its discussion of refinancing risk, but rather what it reveals about the consequences of the post-2008 era of ultra-low interest rates.

As the article acknowledges, years of exceptionally low borrowing costs helped finance stock buybacks, private equity acquisitions, and investments that may not have occurred under historically normal interest rate conditions. For perspective, the average Effective Federal Funds Rate over the past seven decades has been approximately 4.6%, far above the near-zero rates that prevailed for much of the period following the Global Financial Crisis. I wrote about borrowing phenomena in a previous post where I discussed the marginal productivity of debt.

Many economists refer to investments that only appear attractive under artificially low financing costs as "malinvestment." In other words, capital is allocated toward projects that may not be economically justified under normal market conditions. While such investments can create the appearance of growth during the expansion phase, their long-term profitability is often uncertain because they are driven more by cheap credit than by sustainable consumer demand.

This is why some economists view prolonged periods of ultra-low interest rates as laying the groundwork for future economic weakness. When financing costs eventually return to more normal levels, projects that depended on cheap debt may struggle to generate adequate returns. As a result, defaults can rise, capital may need to be reallocated, and economic growth can slow as markets adjust to a more sustainable footing.

Mispriced Risk

The FT article recognizes many of these risks, but ultimately concludes that the situation remains manageable unless economic conditions weaken materially. I am less certain. The longer credit is mispriced, the greater the possibility that underlying vulnerabilities remain hidden. While the economy has thus far been supported by massive AI-related investment spending, the ultimate profitability of many of these investments remains unclear. If those expected returns fail to materialize, the adjustment process could prove more painful than many currently anticipate.

Conclusion

The FT article correctly identifies the distortions created by the era of cheap money. Where I differ is that I believe the risks associated with those distortions may be larger and more meaningful than the authors suggest, increasing the probability of a more significant and material economic correction in the years ahead.