Many have voiced concerns about low IR environments, but I don’t often hear discussions of skew:
when rates are low, future payments are discounted less, meaning that well-understood cash-flows are more valuable than more speculative cash-flows vis-a-vis the higher rate period.
As a simple example, if you had a choice between purchasing a firm that pays out $1 per period if alive, but has a 10% chance of dying every period, OR purchasing a consol that pays out $1 per period guaranteed, then even assuming quadratic utility, if the risk free rate were 5%, the risky firm would be worth 0.3 consols, but if the discount rate were 1%, the risky firm would only be worth 0.08 consols. Similarly, at a 5% discount, a firm that has a 15% chance of dying each period is worth 0.71 times the firm with the 10% death rate. But at a 1% discount, the riskier firm is worth only 65% of the less risky firm.
In other words, in a low rate environment, we must peer farther out in the future, and value stable cash-flows more relative to the uncertain cash-flow. As a result, investments that offer more stable returns (such as land) are given more preferential lending terms to investments whose distant returns are more speculative.
In this relative financing sense, the higher the interest rate, the smaller the gap between the risky and riskless investment (in the limit of an infinite discount rate, our firm would be priced at 0.9 of a consol, as we only care about the first period in which the firm has a 90% chance of paying out a dollar).
This is one argument for why demand-stabilization — effectively increasing certainty about future incomes, can be less distortionary and more supportive of risky investment than lowering rates, which skews the relative value of investments towards safety.
Even within the sphere of productive capital, firms like Coca-Cola will have better borrowing terms than firms like Intel. Of course this is always true to some degree, but the relative advantage increases as the interest rate falls. Safety becomes more important in a low IR environment.
Moreover, financing structure plays a role. In such an environment firms will tend to agglomerate and engage in all sorts of odd business practices — starting resorts, stockpiling metals, etc, as the larger the firm and the more diverse business practices, the greater the borrowing advantage vis-a-vis smaller, more focused firms. Political backing — being too big to fail — also becomes much more important as the interest rate falls. Any aspect of the firm that can increase the likelihood of survival 50 years from now becomes more important than total earnings in the next few periods.
The worst borrower would be the individual who is borrowing against their own labor income. The *relatively* higher rates that they pay for purchase of durables vis-a-vis the rates offered to landholders or well-established/diversified firms is effectively a tax on consumption and a subsidy to investment; or possibly more appropriately, is a tax on personal consumption and a subsidy to the consumption of the conglomerate.