You can rent a 2017 Rolls Royce Ghost for P1,000,000 per day—including driver. You can rent a 2015 Toyota Vios for P1,000 per day—driver not included. Based on the cost of renting—or, more accurately, borrowing—one of these cars, we can reasonably assume that the price of the Rolls Royce is 1,000 times greater than the price of the Toyota.
You cannot buy money, but you can rent or borrow it, and we call that rental cost the interest rate of borrowing. In practical terms—just like with the automobiles—the higher the borrowing or interest rate, the higher the value of the money. In other words, if interest rates are relatively high, then the value of the money is equally high. You do not loan anything, including money, at a low interest rate if the value at that time is high.
The Rolls Royce rents at 1,000 times more than the Toyota because it is 1,000 times more valuable.
Global interest rates are at the lowest level in the past 5,000 years. We have clay tablets from 1771 BC Babylon showing that farmers took out agricultural loans, paying back the debt at a 10-percent interest. Other loans carried a 20-percent interest rate. When King Cyrus of Persia conquered Babylon in 529 BC, interest rates jumped above
40 percent.
Around the time of Christ, Roman interest rates were 4 percent and, by 300 AD, Roman moneylenders were charging 15 percent. Borrowing costs have always gone up and down based on how “valuable” cash was to the holders.
In early-2000 the Philippine government was paying 16-percent interest for borrowing money for 10 years. Now that rate is about 5 percent. Banks were borrowing from the Philippine central bank at 15 percent in 2000 to the current rate of about 3 percent.
What determines whether a cash holder perceives money to be more or less valuable? Cash can either be saved and loaned out, or it can be spent. The first option creates “cash wealth”, and the second increases “asset wealth”.
If you know that tomorrow gasoline prices are going up, you might go out tonight and fill your tank. If you knew that gasoline prices would never be any lower than they are today, you might borrow money and store thousands of liters of gasoline to sell at a profit in the future.
Beginning in 2008, global central banks lowered interest rates to unprecedented low levels, thinking that people would borrow “cheaply” and buy stuff. But the initial growth was not high enough to make it profitable to buy things and expect to make a profit reselling. So, instead, all the extra money pumped into the economies went into buying paper assets like stocks.
Since the end of 2008, the total value of the United States economy has increased by $3.9 trillion. The US Federal Reserve Bank has pumped $3.5 trillion into that economy. Private-sector debt has gone up by $2.6 trillion. Public-sector debt increased by $10 trillion. The total value of all the stocks listed on the New York Stock Exchange has increased by $11.1 trillion. In effect, most of the money borrowed in the past nine years was used to buy stocks.
Stock prices will continue higher until interest rates go up to a point that it makes more sense to buy and sell hard assets for profit—like that gasoline—than to buy paper assets like stock. And you will not have to worry about that for the next nine to 12 months. So enjoy the stock market while you still can.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.