Experts from all over the financial space, sound the alarm on continuous low-interest rates. They are concerned about the effect that has consumer sentiment, investor confidence, and on corporations. One critical problem that a low-interest-rate environment may cause is the issue of malinvestment.
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But what is malinvestment and why does it matter to society, bitcoiners, and cryptocurrency enthusiasts?
Let us find out all about malinvestments and its significance in an economy.
What is Malinvestment?
Malinvestment is an incorrect form of investment where funds go to unproductive activities — thereby burning capital and destroying value (human capital and financial capital). It forces a move toward reprioritization and authentic, productive activities.
It is essential to note that incorrect or improper in this context means that this investment will likely not contribute to a sustainable operation over the long-term. It means allocating value to an activity that will not be profitable for the foreseeable future or will not have strong value over the long-term.
Malinvestment is an essential concept because improper investments can affect a wide variety of industries, have spillover effects into the broader economy. They may necessitate a painful economic reset (where pain varies based on the level of malinvestment).
Businesses involved in malinvestment waste resources, employees waste time, and operations may be for naught. These businesses may also need to take on more debt, conduct speculative activities, cause more economic harm through hidden risks.
Valuable companies provide a needed service or good within an economy, have enduring traits, and operate above the cost of capital.
Malinvestments In the Real World
We know that malinvestment can easily take place in any environment but much more so in low-interest-rate situations.
An example, an entrepreneur, let’s call her Lucy, has an idea, she falls in love with the idea and tries to manifest it within the marketplace. Now, we already see one problem from the start, Lucy loves the idea, but we don’t know if the market does. Still, Lucy persists, she creates the product or the service and seeks to sell it.
She tries and finds that there’s no demand. But resources were utilized, investment capital was allocated, time was spent, and returns didn’t materialize. Malinvestment occurred. Now, this is fine in sporadic and small scale incidents but spread out, and increased events can signal urgent issues.
Low-interest rate environments can create more haphazard investments, spur speculative frenzies, thus resulting in massive value destruction.
We’ve been in a low-interest-rate environment for more than ten years.
Low Interest Rates and Malinvestments
Drew Matus commented recently to CNBC “that the Fed shouldn’t be cutting rates.” The financial strategist further notes, “the lower interest rate environment is hurting and not helping the economy” as more “save more money, not less.
Matus comments,” its keeping companies in business that shouldn’t be in business, keeping people working at firms where they shouldn’t be working, and keeping productivity lower and wages lower.”
Many fear that lower interest policies have led to the creation of businesses that are likely to keep losing massive portions of money regularly, leading to substantial value destruction.
Malinvestments occur, some argue, due to a lack of sound money. Further bitcoiners claim that good sound money and store of value assets such as bitcoin fixes this issue.
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