Another impact of rising rates and declining demand is decreased credit lines and increased costs.
The world, particularly business in the US, really did get used to cheap borrowing for everything. Using a line of credit for everything or acquiring massive amounts of easy to service debt has been basically a standard business practice for the last 20 years.
I am actually surprised things haven't imploded yet. So many companies have acquired massive debt that's going to become increasingly impossible to service. It feels to me like we are waiting for the first big domino to fall.
I mean, we have seen this before. This is particularly classic in retail, with a lot of overleveraged expansion of new locations by both department and big box stores in the US.
Some dominoes took longer to fall than others (Circuit City was fast, Sears took half a century)
I'm seeing this right now in retail, actually. Particularly retail that got snapped up during the pandemic by private equity which already had high levels of debt. They are opening new stores left and right… and their expansion seems unabated by recent rate hikes. I have to imagine that can not last forever.
This was the case against raising interest rates in the EU. It’d affect the servicing of the debt for countries like Italy.
Companies are screwed. Big companies might get bail out, or not. Governments, especially big ones like Italy, will probably get a bail out and break the stupid system once and for all.
It’s not that the system does not work, but it’s getting abused left and right by people who think they know shit about economics.
If the massive debt is at 1 or 2% interest they could essentially bank a fairly small portion of it to service that interest. When instead debt is at 7+% it's a whole other story. You better be building something that will shake loose enough profit to service the debt.
The world, particularly business in the US, really did get used to cheap borrowing for everything. Using a line of credit for everything or acquiring massive amounts of easy to service debt has been basically a standard business practice for the last 20 years.
I am actually surprised things haven't imploded yet. So many companies have acquired massive debt that's going to become increasingly impossible to service. It feels to me like we are waiting for the first big domino to fall.