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The article says just the opposite. > Cheaper leverage? Not likely. High rates of inflation generally cause borrowing to become dearer, not cheaper. Galloping
by fwdpropaganda 9y ago
The article says just the opposite.
> Cheaper leverage? Not likely. High rates of inflation generally cause borrowing to become dearer, not cheaper. Galloping rates of inflation create galloping capital needs; and lenders, as they become increasingly distrustful of long-term contracts, become more demanding. But even if there is no further rise in interest rates, leverage will be getting more expensive because the average cost of the debt now on corporate books is less than would be the cost of replacing it. And replacement will be required as the existing debt matures. Overall, then, future changes in the cost of leverage seem likely to have a mildly depressing effect on the return on equity.
To be honest my intuiton is like yours. I still haven't managed to reconciliate my intuition with the above quote. I guess it would be something like this: It is true that inflation means that the stream of cash you will pay back is worth less, but the costs of keeping your business running (which in turn is what generate those stream of cash) also goes up. When this happened, lenders become more strict.
You can read further down:
> Nevertheless, given inflationary conditions, many corporations seem sure in the future to turn to still more leverage as a means of shoring up equity returns. Their managements will make that move because they will need enormous amounts of capital — often merely to do the same physical volume of business
- HillaryBriss 9y agoIn this light, it's interesting as a counterpoint to look at inflation's systemic effects. After the 2008 real estate loan bust, many economists hoped for more inflation so that the existing pool of loans would be a little more manageable for the debtors. (In Japan, they've been trying to increase inflation for decades). Even today, on financial news feeds and Bloomberg, when economic observers talk about "good news on inflation" they usually mean inflation going up, not down. I guess, overall, there's a sweet spot for inflation. Or what's good for corporate profits and banks is sort of opposed to what's good for the overall collection of people in the economy.
- fwdpropaganda 9y ago> Even today, on financial news feeds and Bloomberg, when economic observers talk about "good news on inflation" they usually mean inflation going up, not down. Indeed, the sweet spot is believed to be 2%. It's good news because we've been under that for so long, not because the more the better. > After the 2008 real estate loan bust, many economists hoped for more inflation so that the existing pool of loans would be a little more manageable for the debtors. I'm not an expert, but I'll just point out that debt from a loan that you've put into a house probably doesn't have the same mechanics as debt from a company trying to fund its capital requirements. Not saying I agree or disagree with those economists, just pointing out maybe they're different.
- exHFguy2 9y agoRegarding business debt ---- > It is usually floating rate and has a shorter term. You will have to roll the debt more often as you refinance. Thus, you will pay the higher inflation costs. And if inflation costs are unpredictable, then lenders will require a higher risk premium on the inflation piece.