Markets Are Still Mispricing Higher Capital Costs

The end of cheap money and the repricing of capital

The central question in this report is whether the economy and markets have fully absorbed the shift from the zero-rate era. For more than a decade, cheap money altered behavior across households, firms, governments, and asset managers by making leverage accessible, extending time horizons, and lifting valuations through discount rates that were no longer binding. That regime is ending. The current environment forces a repricing of capital, which matters now because the adjustment is still working through balance sheets, business models, and public policy assumptions built for a world where money was abundant and rate volatility was suppressed.

The structural drivers behind this regime change include more than temporary inflation or isolated central bank decisions. The neutral rate of interest has moved up as the disinflationary forces that anchored the last cycle weakened. Global savings dynamics have changed, demographics are less supportive, and governments are borrowing into a constrained funding environment. Central banks face a narrower operating window, a higher neutral rate means policy must remain tighter to restrain demand, while the ability to cut aggressively in downturns is reduced. The result is a system with a higher floor for capital costs, greater sensitivity to debt loads, and less room for assets or institutions to rely on low financing conditions.