Also known as tight money in some areas of the world, dear money is a term that refers to the fact that obtaining cash or loans can be a difficult task. Typically, what few loan options are viable for a given consumer may carry interest rates that are much higher than in other circumstances. This type of situation can arise at any time, but is most common when the economy of a particular country is in recession and unemployment rates are increasing at a steady pace.
When a state of dear money exists, it has a profound impact on businesses and individuals alike. For companies, this situation makes it much harder to raise the capital needed to fund any type of expansion efforts, or even to borrow money that can be used to make improvements to an existing facility. Consumers may find that purchasing a home or obtaining a car loan is much more difficult than in times past, and may not be possible until the current economic climate comes to an end.
Fortunately, periods where dear money is the order of the day eventually come to an end. This is illustrated by the changes that occur within an economy when a nation begins to emerge from a recession. As conditions improve, lenders begin to lower interest rates and to some extent relax the qualifications that individuals and companies must meet in order to be approved for a loan. This in turn has a positive impact on a number of industries, since consumers are once again in the position to make purchases that in turn generate increased demand. From there, companies begin to recall workers who were laid off during the recession, households begin to have more disposable income, and the flow of money is no longer considered to be tight.
Investors who watch dear money situations closely can not only avoid incurring losses during this period, but also increase their returns. This involves the task of paying close attention to the difference between bidding prices and asking prices, normally referred to as the bid-ask spread. If the spread is somewhat narrow, the chances for earning returns on the sale of investments is limited, since it would be hard to earn more profit off each unit sold. Should the current spread during the dear money situation be somewhat wider, then the investor does have the chance of earning more per unit sold and increasing his or her profits considerably.
