Interest Rates and Valuation

Higher interest rates do more than cause prices to rise and investments to be postponed or cancelled.  They can reduce valuations of assets.  With higher interest rates, it takes longer for an asset to earn a market return, which reduces its net present value.

Also, loans made at a lower interest rate are worth less to potential buyers of such investment contracts when rates go up.  Thus, in the U.S., the Silicon Valley Bank bankrupted itself by putting too much of its capital into low interest rate U.S. government bonds.

Now in the U.S., nearly every publicly traded bank corporation has loans on its books as assets, which are worth less today than when they were made.  Rising interest rates cause the decline in market value of the loan repayment notes.

The mission of capitalism is to create wealth.  High interest rates, then, put obstacles in the way of that achievement.

So, when we seek to evaluate the social good – the public good – of capitalism, we should keep a close eye on those conditions which make for wealth creation and those which inhibit such economic growth.

Managing interest rates is a seeking of balance between too high and too low.  A middle way suggests itself as most conducive to enhancing society’s well-being.