Four Investment Scenarios in Capital Markets

¶ … Investment Scenarios

During the last several years, the U.S. economy has been going through a number of challenges. As it went through a major economic contraction and began expanding. However, the underlying rates of growth have not been sufficient enough to erase the job losses that were created from the last recession. This means that there are two scenarios that are most important today. ("Kiplinger Economic Outlooks," 2013)

Outward shift in supply of capital occurs in situations where new sources of capital enter the market, either from a domestic savings (people desire to save more) or foreign investment sources. The greater the supply of capital requires banks and other intermediaries to reduce the interest rates and encourage more borrowing. Net result: Lower interest rates and more capital invested.

In this situation, the outward shift in capital is resulting in an increase in the money supply and available sources to lenders. The lower interest rates are contributing to higher amounts of growth. As central banks around the world have cut them and want to stimulate the economy. This means that working capital is available from domestic and foreign sources. ("Kiplinger Economic Outlooks," 2013) (Hall, 2009)

This is has been taking place with the U.S. economy since 2009. As the Fed lowered interest rates to historic lows and they have been encouraging financial institutions to provide firms with more investment capital. Even though there has been talk of the Fed starting to raise interest rates. Most of this is premature. The net impact is the stock market is continuing to reach and break all time highs. While the housing market has stabilized with the economy generating an average of 140 thousand new jobs a month. This scenario is important today, in illustrating the current state of the economy and what it has been through. ("Kiplinger Economic Outlooks," 2013) (Hall, 2009)

Inward shift in the supply of capital occurs when people decide to cut back on their savings or foreigners withdraw investment capital. With fewer loan-able funds available, banks and other financial institutions must ration the funds, causing interest rates to climb and fewer investments projects. Net result: Higher interest rates, less capital invested.

In this case, the economy is slowing from a reduction in the loans available and a withdrawal of foreign direct investment capital. This is causing interest rates to spike as there is less money in the banking system with a focus on reducing liquidity. Moreover, there is also the realistic possibility of higher inflation. This is taking place, with central banks raising interest rates to prevent them from increasing further. The effects are that consumers have stopped spending and businesses are laying people off. This is indicating how the economy is falling into a steep recession that is fueled by inflation. ("Kiplinger Economic Outlooks," 2013) (Hall, 2009)