{"id":16075,"date":"2016-01-06T11:35:03","date_gmt":"2016-01-06T16:35:03","guid":{"rendered":"http:\/\/olduvai.ca\/?p=16075"},"modified":"2016-01-06T11:35:03","modified_gmt":"2016-01-06T16:35:03","slug":"falling-interest-causes-falling-profits","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=16075","title":{"rendered":"Falling Interest Causes Falling Profits"},"content":{"rendered":"<header class=\"wrapper entry-header page-header\">\n<div class=\"title-with-sep single-title\">\n<h3 class=\"entry-title\"><a href=\"http:\/\/www.cobdencentre.org\/2016\/01\/falling-interest-causes-falling-profits-2\/\" target=\"_blank\">FALLING INTEREST CAUSES FALLING PROFITS<\/a><\/h3>\n<\/div>\n<\/header>\n<div class=\"entry-media\">Most people assume that prices move as a result of changes in the money supply. Instead, let\u2019s look at the effect of changes in interest. To start, consider a hamburger restaurant. Suppose that the average profit in the burger business is ten percent of invested capital. If MacDowell\u2019s is thinking about expanding, it has to consider the interest rate. Why?<\/div>\n<div class=\"wrapper\">\n<div class=\"grids\">\n<div class=\"grid-8 column-1\">\n<div class=\"single-box clearfix entry-content\">\n<p>Typically, most of the capital to expand a business is borrowed. MacDowell\u2019s has to borrow the cash to build out its new store. If the\u00a0<strong>cost<\/strong>\u00a0of capital is greater than the\u00a0<strong>return<\/strong>\u00a0on capital, then it makes no sense to expand. Let that sink in, because it is vitally important. You cannot borrow at 10% to earn 8%.<\/p>\n<p>Of course not all of the capital is borrowed. MacDowell\u2019s also puts up some of its own funds (or at least it would in a normal world without a central bank drowning the markets with liquidity). The company has to consider what else it could do with that cash. If it could earn more on a bond portfolio, why should it take business risk? Let this sink in also. You should not invest in business equity to earn less than the yield on bonds.<\/p>\n<p>We have just looked at two connections between interest and profit margins. It is both impossible and undesirable, to expand a business which earns less than the interest rate. Now let\u2019s look at the connection in the other direction. MacDowell\u2019s profit-seeking behavior actually affects interest.<\/p>\n<p>What happens to the interest rate if MacDowell\u2019s borrows at two percent to build a hamburger stand that makes ten percent? The very act of borrowing pushes up the interest rate slightly (in a normal world). The very act of opening another hamburger store pushes down the rate of profits on hamburger stores.<\/p>\n<p>&#8230;click on the above link to read the rest of the article&#8230;<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>FALLING INTEREST CAUSES FALLING PROFITS Most people assume that prices move as a result of changes in the money supply. Instead, let\u2019s look at the effect of changes in interest. To start, consider a hamburger restaurant. Suppose that the average profit in the burger business is ten percent of invested capital. If MacDowell\u2019s is thinking [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[109,7380,7217,431,954],"class_list":["post-16075","post","type-post","status-publish","format-standard","hentry","category-economics","tag-capital","tag-cobden-centre","tag-corporate-profits","tag-interest-rates","tag-money-supply"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/16075","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=16075"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/16075\/revisions"}],"predecessor-version":[{"id":16076,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/16075\/revisions\/16076"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=16075"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=16075"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=16075"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}