Tuesday, October 27, 2015

Fed's Low Interest Rate Policy Decreased The Value Of Investing In Risky Growth Opportunities

My comment to The Wall Street Journal, Opinion, Commentary, "The Fed Has Hurt Business Investment: QE is partly to blame for record share buybacks and meager capital spending." by Michael Spence and Kevin Warsh:
Investors know that the most valuable and the most risky business opportunities are those with growth potential. Growth potential creates competition and uncertainty with the potential for huge rewards to investors and the economy.

Low interest rates increase the value of existing and mature investments with limited growth potential. Low interest rates can turn a new opportunity's negative net present value (time valued payback) to positive and increase investment in marginal business opportunities without growth potential.

Real (call) Options are a good way place a value on the uncertain future growth potential of capital investments. Low interest rates decrease the value of call options. A lower value for Real Options and growth decreases investment in growth opportunities.

Net (w/o existing capital replacement) Business Investment is low. The Fed's low interest rates decreased the value of investing in risky growth business opportunities and stunted the growth of the US economy.
Also, see my April 23, 2015, blog post, "Disinvestment: Declining US Business Domestic Investment In Excess Of Depreciation."

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