Low interest rates drive a relentless growth-at-all-costs mindset, especially in industries like tech, real estate and venture capital. Much like fast fashion, which encourages short-term, low-cost consumption at the expense of quality and sustainability, these low rates carry concealed risks and long-term consequences.
Low interest rates have fostered a culture of debt addiction, where excessive borrowing has left companies and governments dangerously over-leveraged. This environment has also encouraged risk-taking behaviour, much like fast fashion drives impulsive purchases that lead to waste, speculative investments thrive in low-rate conditions but often lack resilience as rates fluctuate. Ultimately, just as fast fashion’s low-quality appeal wears thin, the era of easy money has led to economic instability as interest rates normalize.
Fast fashion is focused on quickly designing, manufacturing and marketing clothing based on the latest fashion trends in high volumes. These cheaply produced, trendy clothes have driven consumers in an addictive shopping cycle resulting in overwhelming amounts of consumption, with harmful impacts on the environment, garment workers, animals and consumers’ wallets.
Similarly, the low-interest rate cycle environment that has settled in following the 2008-2009 financial crisis has undertones akin to fast fashion. Low-interest rate environments tend to benefit borrowers at the expense of lenders and savers. The result is generating a debt addiction characterized by excessive borrowing, leading individuals, companies and governments alike to become over-leveraged.
Global debt, according to a recent report by the Institute for International Finance, amounted to a record high of over $315 trillion in the first quarter of 2024, equal to 333 per cent of global GDP. By comparison, the global debt levels in 2007 were 97 trillion and represented 207 per cent of the global GDP. What does this level of global debt mean for the economy and how much debt is too much?
During the last two years, we had the opportunity to observe what happens when a low-interest environment is reversed, and it was not pretty. For many companies, it resulted in reduced revenues and profits, reduced demand and postponing CapEx investments due to increased financing costs. Just as fast fashion’s appeal fades quickly due to poor quality, the allure of easy money also leads to “wear and tear” and will likely result in economic instability as rates normalize.
Low rates encourage investors to adopt a risk-taking behaviour, by accepting increased risk in pursuit of greater return because returns on safe investments are considered unacceptable. Just as fast fashion leads to impulse buying and waste, low interest rates have spurred speculative investments that may not hold up as interest rates fluctuate. This leads to people making investments that should not be made, such as software apps being created that should not be created, buildings being built that should not be built, risks being taken that should not be taken.
The only solution to get out of the fast fashion of financial investment is thorough diligence, high standards and an appropriate level of risk aversion. As we come back to reduced interest rates, we can use what we learned from this relatively brief experience to build stronger businesses and make wise investments that withstand the test of time and grow in value.
Andreea Lupascu, PhD, Sapling Financial Consultants Co-Founder & Partner
Andreea co-founded Sapling and is a partner at the firm. With a Ph.D. in Experimental Condensed Matter Physics from the University of Toronto, Andreea transitioned into finance, bringing expertise in data analysis and problem-solving in complex systems. Andreea believes that informed decision-making is key for small and medium businesses to thrive in today’s fast-paced, resource-constrained world.
