The global economy was fueled for years by low-cost borrowing, and money is still cheap now. But that's changing. Here's why it's happening -- and how to respond.
For more than a generation, the price of money has been falling.
Is there a global infrastructure boom?
Over the past 30 years, it's been an economic truth that credit has been and will always be cheaper. That encouraged people to borrow. Consumers offset stagnant wages and a higher cost of living by running up debt. The savings rate dropped from nearly 12% in 1975 to a low of 1.2% in 2005, while household debt swelled from 68% in 1977 to 128% of disposable income in 2007. (Both numbers have improved a bit since those lows.)
This helped finance the consumer-spending boom that drove the economy forward. It funded new industries and new jobs. On the downside, it encouraged two economic bubbles, in tech stocks and real estate. And it helped the government finance a steady stream of budget deficits, thanks to tax cuts, war expenditures, stimulus initiatives and economic bailouts. It's hard to blame people for taking advantage of historically cheap money around the world. Short-term interest rates have fallen to 500-year lows, based on an analysis of historical data from the Federal Reserve, the Bank of England and the Bank of St. George in Italy by the folks at Global Financial Data. Sidney Homer and Richard Sylla go back even further in their "A History of Interest Rates," which suggests that money hasn't been as cheap and plentiful as it is now for virtually the whole of human history -- going back to 3000 B.C., when the Babylonians charged rates of at least 20%.
But this era is ending as we roll into a global infrastructure and investment boom the likes of which we haven't seen since the post-World War II reconstruction of Japan and Europe.Life without cheap moneyThis change will produce strains on the global financial system on a scale that hasn't been seen in 60 years.
Many governments will be forced to address out-of-control budget deficits and unsustainable debt levels with higher taxes and austerity. Consumers will be forced to deleverage and cut spending. Investors will need to rediscover equities after a recent fascination with bonds. And businesses will need to do more with less capital. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=f5254587-6187-4f67-ab86-200baad6b38c,b773a14e-2293-4624-9dd3-364bc6f31153,16370fd7-92eb-40d8-b158-d70de9857292,c8563c1f-496d-4023-b604-0700944570ab,8a410345-bc8b-480a-8747-4878985b108f,70f549a7-d4af-437c-b0e9-0086d55438ef,a5014db2-b384-4dd5-b6e5-09da23031305,070e5ec1-3441-47ae-b584-73cce9888804", "player.fr": "iv2_en-us_money_article_16x9-Extra-the-end-of-the-cheap-money-era-mirhaydari"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=f5254587-6187-4f67-ab86-200baad6b38c,b773a14e-2293-4624-9dd3-364bc6f31153,16370fd7-92eb-40d8-b158-d70de9857292,c8563c1f-496d-4023-b604-0700944570ab,8a410345-bc8b-480a-8747-4878985b108f,70f549a7-d4af-437c-b0e9-0086d55438ef,a5014db2-b384-4dd5-b6e5-09da23031305,070e5ec1-3441-47ae-b584-73cce9888804;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');This will mean the end of 0% credit cards, 0% auto loans, interest-only mortgages and low-cost auto leases. If you need to borrow money for something, now's the time.
But there are also many positives, including lucrative new opportunities for investors, especially in those companies set to profit from the modernization of the developing world. Banks are also set to do well as higher interest rates increase loan profits.
First, let's review how we got here. Savings glut or investment dearth?Economists have pointed to various causes for ultralow interest rates, which are a function of the supply of money (from savings) and the demand for money (from investment in productive assets). Fed Chairman Ben Bernanke suggested in 2005 that a "global saving glut" led by the likes of China was funneling excessive savings into the United States -- which helped inflate the housing bubble by keeping long-term interest rates low.
New research by McKinsey Global Institute puts the blame on a lack of investment -- equivalent to $20 trillion over the last 30 years, the size of the U.S. and Japanese economies combined. Investment in infrastructure, housing, machinery and equipment fell from a peak of 26% of gross domestic product in the 1970s to a low of 20.8% in 2002 and just 21.8% now.
We can see evidence of this inadequate investment all around the developed world.
I've written about how the capital base of the United States is shrinking as businesses let their factories fall into disrepair. The American Society for Civil Engineers gave our infrastructure a "D" grade in its latest report card and estimates that we need to spend $2.2 trillion over the next five years to rebuild bridges, fix water supplies and upgrade our schools, roads and energy systems. The government estimates that while U.S. road use nearly doubled from 1980 to 2008, system capacity increased by just 8%. It's no wonder rush-hour traffic is so terrible.
It's not just here. In London, 40% of the city's water mains are more than 100 years old and 12% are more than 150 years old.
The other story is the emerging demand for new homes, factories, office towers, hospitals, shopping centers, schools and utilities across the developing world. McKinsey believes that if consensus forecasts of global growth are realized, worldwide investment will exceed 25% of GDP in 2030, or $24 trillion -- up from $11 trillion today.
Continue: The coming investment boom More from MSN Money
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Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=6.533333; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=45;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingStocks to WatchGeneral MotorsGoldcorpHewlett-PackardChevronNewmont MiningBank of AmericaPfizerAT&TRecent Articles by Anthony Mirhaydari10 picks for the epic bull market 12/22/2010Why it's safe to buy homes again 12/15/20102011: The most new jobs since '95? 12/08/2010More . . .Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 6CommentsNewestOldestBestWorstControversialneedee14 hours agostrrig228:
Honest people aren't interested in getting into politics. Republicans don't have the answers and neither do the Democrats. I thought I had the solutions once but they seem more and more farfetched. Quite frankly we're doomed not matter what we do now. Even though America won't be #1 anymore it was a great ride!!
0 0ReportSpamstarrig2287 hours agothe people of this country need to vote everyone in government out of office and put some new people that are honest , and not corupted but special intrest groups. people who work for the people!!! 0 0ReportSpamstarrig2287 hours agoget rid of all the republicans and we would all be better off!!! 0 1ReportSpamearnest78 hours agoAnthony, thanks for the insightful perspectives. You did not give a symbol for the ML infrastucture index fund -- the only one i could find at the link MLEIINFT is in Euros. Is there one in USD? 0 0ReportSpamdinahrose9 hours agoI have to agree....cut the parties out of the White House and extinguish their lavish trips....bet that will save a bunch of money....lol. Oh, and no more high-dollar dogs for the kids..lol.
0 0ReportSpamld (Agnos) 9 hours agoI am all for reducing debt, paying cash for what I buy. Now we just need to demand the federal govt. to do the same..... 1 0ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of ConductPlease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment? var initData = {"partnerId":"54bd59b2-6179-4753-ac3f-009a75d55388","jsUrl":null,"strings":{"lc_shw":"true","lc_dtf":"%M/dd/yyyy %h:mm tt","lc_dtf2":"ddd %h:mm tt","lc_gmt":"-5","lc_erg":"Comments are currently unavailable. 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But there are also many positives, including lucrative new opportunities for investors, especially in those companies set to profit from the modernization of the developing world. Banks are also set to do well as higher interest rates increase loan profits.
First, let's review how we got here. Savings glut or investment dearth?Economists have pointed to various causes for ultralow interest rates, which are a function of the supply of money (from savings) and the demand for money (from investment in productive assets). Fed Chairman Ben Bernanke suggested in 2005 that a "global saving glut" led by the likes of China was funneling excessive savings into the United States -- which helped inflate the housing bubble by keeping long-term interest rates low.
New research by McKinsey Global Institute puts the blame on a lack of investment -- equivalent to $20 trillion over the last 30 years, the size of the U.S. and Japanese economies combined. Investment in infrastructure, housing, machinery and equipment fell from a peak of 26% of gross domestic product in the 1970s to a low of 20.8% in 2002 and just 21.8% now.
We can see evidence of this inadequate investment all around the developed world.
I've written about how the capital base of the United States is shrinking as businesses let their factories fall into disrepair. The American Society for Civil Engineers gave our infrastructure a "D" grade in its latest report card and estimates that we need to spend $2.2 trillion over the next five years to rebuild bridges, fix water supplies and upgrade our schools, roads and energy systems. The government estimates that while U.S. road use nearly doubled from 1980 to 2008, system capacity increased by just 8%. It's no wonder rush-hour traffic is so terrible.
It's not just here. In London, 40% of the city's water mains are more than 100 years old and 12% are more than 150 years old.
The other story is the emerging demand for new homes, factories, office towers, hospitals, shopping centers, schools and utilities across the developing world. McKinsey believes that if consensus forecasts of global growth are realized, worldwide investment will exceed 25% of GDP in 2030, or $24 trillion -- up from $11 trillion today.
Continue: The coming investment boom More from MSN Money
1 | 2 | next >
strrig228:
Honest people aren't interested in getting into politics. Republicans don't have the answers and neither do the Democrats. I thought I had the solutions once but they seem more and more farfetched. Quite frankly we're doomed not matter what we do now. Even though America won't be #1 anymore it was a great ride!!
I have to agree....cut the parties out of the White House and extinguish their lavish trips....bet that will save a bunch of money....lol. Oh, and no more high-dollar dogs for the kids..lol.
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