Falling Interest Rates Hurt Those With Short-dated Assets

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Falling interest rates may actually be a detriment to wealthy individuals because of its negative effect on short-dated assets.

Adrien Auclert from Stanford University asserts that when evaluating the impact of falling interest rates, three different areas need to be carefully looked at. These three areas are the macroeconomic impact of falling interest rates, the impact of inflation and the impact of falling interest rates on asset prices.

Conventionally it is believed that when interest rates fall then asset-holders benefit. However, instead, Auclert asserts that you need to see whether your assets and your liabilities mature at the same time.

If you are an individual with short-dated assets but long-dated liabilities, then you fare badly when rates fall. This is because you need to save up more of your assets in order to spend later. However, if you have long-dated assets and need to spend now, then falling interest rates work in your benefit. Wealthy individuals tend to be on the losing side of this dynamic.

Falling interest rates are effective in making different sources of future income increase in value. Such future sources of incomes include, stocks, bonds and living rent free in a paid off home. Falling interest rates only allow a person to effectively access the increased value in future income if they have predominantly long-date assets.

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Economics, Finance and Investing

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