Interest Rates

We see some increase in interest rates and it gave the stock market a bit of a shock.  The rate on the US 10 year creeped over 3% but it has gone back below that threshold now.

These are still pretty low rates but there is a ripple effect of rate increases.

In general it makes money more expensive which makes debt more expensive and effectively has a negative impact on the money supply.

While the US Mint does in fact print currency, that is just a representation of the money in use.

The supply of money is determined by a number of fairly complex factors which simplistically can be equated to the value of all assets backed by US dollars.

Not all this money is readily available (liquid) but if I have a house (asset) with $50,000 of equity in it, I effectively have that much money to leverage.

Where it gets complex is in how that leverage works, and if credit gets more expensive it makes assets less valuable reducing equity and leverage reducing the money supply.

Now, it is in many ways more complex than that, but in the financial crises we saw credit become unavailable, equity crash, money virtually disappear and everyone felt the pain.

A firm can be valued in the billions one day and have effectively no value the next if they have high debt and declare bankruptcy.

This is why changes in interest rates that seem almost insignificant can have dramatic impacts.

Of course in rising interest environments, you might want to deleverage and put your money into instruments that benefit.

You might.