- Cheap money can inflate asset prices and encourage risk-taking, but rising rates can expose the debt behind those gains.
- Rising rates can force investors to sell assets to cover higher costs, potentially turning financial stress into a broader crisis.
- A Gold IRA can help protect your finances with physical gold that requires no refinancing and carries no credit risk.
When Cheap Money Gets Expensive
Low interest rates make it easier to borrow, spend and push asset prices higher.
But money doesn’t stay cheap forever. When financing costs rise, assets bought with cheap debt become more expensive to carry. Investors may be forced to unwind their positions, selling assets to cover those higher costs. On a large enough scale, that rush to unwind investments can turn financial stress into an economic crisis.
Cheap Money Changes Behavior
The Federal Reserve has warned that prolonged periods of low interest rates can contribute to elevated asset valuations and encourage greater risk-taking.
Cheap mortgages can help buyers afford more expensive homes. Lower financing costs can support higher commercial property prices. Investors may also take greater risks when safer assets offer little income.
History shows how quickly those conditions can change when rates rise.
Housing Shows How Debt Can Magnify a Downturn
The housing boom before the 2008 financial crisis offers a dramatic example. Low interest rates following the 2001 recession helped support housing activity. Easier mortgage credit and increasingly risky lending also contributed to the boom.
Average U.S. home prices more than doubled between 1998 and 2006. During the same period, household mortgage debt climbed from 61% of GDP to 97%.
When home prices began falling, the debt accumulated during the good years magnified the downturn. Losses spread throughout the financial system. The S&P 500 ultimately fell 57% from its October 2007 peak to its March 2009 low.1
Commercial Real Estate Faces the Same Math
Commercial real estate provides a current example of what happens when cheap financing disappears.
About $875 billion in commercial and multifamily mortgages are scheduled to mature during 2026. Roughly one out of every six dollars of outstanding commercial mortgage debt must find new financing this year.
Commercial real estate may be approaching a refinancing crisis. The office CMBS delinquency rate stood at 12% in August, near its all-time high, as some borrowers failed to pay off loans when they matured.2
Many properties were financed when rates were much lower. A building may generate roughly the same rent it did a few years ago, while refinancing the debt behind it now costs substantially more.
The IMF reported that U.S. commercial property prices had already fallen about 11% after the Federal Reserve began raising rates in 2022.
Cheap Money Also Lifted Stocks
Low rates can also support higher stock prices. The Federal Reserve has acknowledged that low interest rates increase the present value of future corporate earnings, while low bond yields can encourage investors to seek higher returns in stocks.
Those conditions helped create a favorable environment for growth stocks and today’s AI boom. Major technology companies are expected to spend roughly $698 billion on capital projects in 2026, much of it tied to AI infrastructure.
Higher rates make that spending more expensive while giving investors more attractive alternatives to richly valued stocks. Concerns about an AI bubble could grow if financing costs rise and investors become less willing to pay high prices for profits expected years into the future.
Japan Could Be the Next Test
For decades, investors borrowed yen at extremely low Japanese interest rates and put that money into assets offering higher returns elsewhere.
Now the conditions supporting that strategy are changing.
The Bank of Japan has raised its policy rate to 1%, its highest level in 31 years, and investors are watching for another increase. Cross-border yen borrowing, a proxy for carry-trade activity, has reached a record 360 trillion yen, or about $2.35 trillion.3
Higher Japanese rates make the strategy less profitable. A stronger yen adds pressure because investors need more money to repay what they borrowed.
Investors exiting the trade may have to sell stocks, bonds or other assets and buy yen to repay their loans. If enough investors sell at once, pressure could spread far beyond Japan.
Markets Have Seen It Before
August 2024 provided a preview.
After a Bank of Japan rate increase and a rapid rise in the yen, carry trades began reversing. Japan’s Nikkei plunged 12.4% in a single session, its worst percentage decline since Black Monday in 1987.
Selling quickly spread beyond Japan, and U.S. stocks also fell sharply as investors reduced leveraged positions.
Markets have more time to prepare for the next Bank of Japan move. The bigger risk comes from the speed of the adjustment. A rapid rush for the exits could still force investors to sell assets across global markets.
Gold Sits Outside the Borrowing Chain
Assets built on cheap financing can come under pressure when rates rise. Physical gold does not rely on that borrowing cycle.
Gold does not need refinancing and carries no credit risk. Its value does not depend on a borrower making payments, which can make physical precious metals a useful source of diversification when financial conditions tighten.
If you want to protect your portfolio with physical precious metals in a Gold IRA, contact AHG today at 800-462-0071.