What if your entire worldview was just because of near-zero interest rates?

https://novum.substack.com/p/what-if-worldview-zero-interest-rates

by antonomon • 4 years ago

283 382 4 years ago

novum.substack.com

antonomon6• 4 years ago

The old economic world may be leaving us, but its pathologies stubbornly remain.

dangus2• 4 years ago

I think the article brings up too many separate concepts without sufficiently tying them together.

One of the most basic concepts you have to accept to agree with the premise of the article is that the Fed kept interest rates low to transfer wealth to the wealthy.

After the Great Recession, the Federal Reserve instituted a zero or near-zero interest rate regime. The philosophy behind it was simple:
> The Fed’s “strong and creative measures” would inflate stock prices, which would lead those holding stocks to feel wealthier and more confident, and then they’d spend a little more, and some droplets of this might trickle down to the people that are working in the real economy.5

Of note is the fact that the citation for this quote is some random dude Wolf Richter's website. The guy's a former car dealership manager, and that's the extent of his financial background.

A much less sinister and simpler explanation exists: high inflation rates are bad for pretty much the entire economy regardless of level of wealth. We already saw this in action in the 1970s.

I also take issue with a lot of the numbered points in the article. These points seem to avoid the more nuanced multiple factors behind those specific developments:

1. Tech companies are flushed with cash because it's the highest margin business out there. There was no such thing as software company profit margins in the olden days of corporate behavior.

3. The buyback graph didn't show R&D spending decreasing at all or otherwise being impacted by stock buybacks. The cited HBR article doesn't directly link the lack of R&D expenditures to stock buybacks. Aren't there companies out there that have minimal R&D expenses? S&P 500 companies like Dollar General, Costco, Robert Half, and CBRE Group?

4. Isn't the biggest reason to link CEO pay to stocks to avoid personal income tax? That's just a tax efficiency issue.

5. Aren't there other reasons why Vanguard is popular besides the popularity of stocks in general? I always thought it was because the Boglehead ideology spread and Vanguard's low expense ratios proved to be attractive. I see this as "passive versus active investing" not "investing in stocks versus investing in something else."

7. Who says FIRE isn't productive? Where do you think those "tech companies flush with cash" got the cash from?

s1artibartfast13• 4 years ago

I never understood the negative attention stock buybacks have received relative to dividends. They do basically do the same thing, but nobody is offended when companies pay a dividend.

salawat4• 4 years ago

In a stock buyback, the investor only is made whole by "exiting" the stock. I.e., if that stock has voting rights, and you're more interested in being able to influence as a shareholder, you're left out of the "lifting of every risk sinker" when a company does a buyback. In fact, it guarantees that the amount of shareholder influence as a whole decreases, because if someone were to reacquire that share it would be more expensive now.

Stock buybacks are basically attempts to shirk leashes, freeing execs/other shareholders from the ongoing influence of exiting shareholders.

Dividends on the other hand, are straightforward returns on what was a commitment to sink risk. An ongoing source of income for the shareholder as a result of the company thriving. It's a straight up payment of a coupon off a bond. There is no need to exit/re-enter required. Your # of shares do not move. Therefore your relative investment stays as it was, whereas with the buyback, you're handing back your ongoing leash and influence on the company.

Stock buybacks are therefore not equivalent in any way to paying of dividends. I don't know why this is so hard to understand.

realityking3• 4 years ago

Dividends create an immediately taxable event, the value gained in a stock buyback is only taxed when the stock is sold. It’s one contributor to the low amount of taxes paid by the so-called 1%.

mitthrowaway29• 4 years ago

They are completely different with respect to their impact on stock options.

If you hold stock options, a dividend doesn't benefit you. You need to hold shares to get the dividend. In fact, the dividend can cause the share price to fall (if it was not already anticipated) as the company's capital gets drained to pay shareholders.

On the other hand, buybacks (causing a sudden, surprising increase in share price) are most impactful on those who hold options. Proportionally speaking, they increase the value of options much more than the value of shares. The share price might go up 2%, and the options 200%.

Executive compensation packages tend to consist of stock options. So buybacks benefit corporate insiders more than shareholders.

flakeoil2• 4 years ago

The post refers to an article [0] which mentions that dividends are also not that great for productivity/R&D spend.

"Excessive dividend payouts, however, can undercut investment in productive capabilities in the same way that buybacks can."

[0] https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...

antonomon6• 4 years ago

Regardless of Wolf Richter, the Wealth Effect is an actual philosophy tapped into by Ben Bernanke and others post-2009

In defending the Fed’s bond-purchasing plan late last year, Bernanke said that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion” (2011)

https://fortune.com/2011/04/21/wheres-the-wealth-effect/

KKKKkkkk1• 4 years ago

The Fed was buying up government bonds in order to reduce long-term interest rates. The focus of Fed policy has always been on the long-term interest rates as a tool to control inflation/unemployment, and raising the demand for government bonds is the most direct way to lower the long-term interest rates. The quote from fortune.com is taking Bernanke's words out of context. Here is the original quote:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

dangus2• 4 years ago

The difference is in the way Wolf Richter presents the concept and mischaracterizes it as trickle down economics.

Wolf says:

…which would lead those holding stocks to feel wealthier and more confident, and then they’d spend a little more, and some droplets of this might trickle down to the people that are working in the real economy

This is distinctly different than what Bernanke says in that quote. Bernanke is saying that the mere economic indicator of higher stock prices boosts consumer confidence, like when someone sees a lower gas price and feels better about the economy.

I have to agree with Bernanke there. The layperson sees a number on the news that says “economy good” and they worry less about losing their job or spending too much.

Richter misunderstands the wealth effect to be the literal spending of money by people who own assets like stocks and the trickling down of that money.

Even if the wealth effect benefits the wealthy more, trickle down economics is not the same concept.

awinder2• 4 years ago

“All of this has led to weird idiosyncrasies, euphoria, and contradictions. Stocks ballooned, tripling in value since 2009”

This is like 9% compounded for 13 years, which is in line with historic averages.

antonomon6• 4 years ago

It continuing unabated for 13 years is a historical anomaly, however

awinder2• 4 years ago

We’ve had 3 bull cycles that lasted around 13 years covering periods in the 50s, 80s and 90s.

https://www.uidaho.edu/-/media/UIdaho-Responsive/Files/Exten...

The +9% average is long-lived and covers periods with drawdowns so no abnormality there.

dnissley• 4 years ago

Hm, but we've had zero interest rates that entire time so shouldn't we have expected even higher returns? E.g. what would the 90s have looked like with zero rates?

carlivar• 4 years ago

And by that thinking, if we could only manage historical averages during pronounced low interest rates, what does it say about the prospect of returns for the next few years?

shock-value• 4 years ago

Lowering rates will give a boost to the stock market in the short to medium term. In the long term, returns will settle closer to the interest rate in question (plus a risk premium). See: Japan over the last couple of decades.

015a2• 4 years ago

The iShares S&P 500 ETF has returned about 11.6% annualized over the past ten years. Their Ex-US ETF: 2.8%.

Point being: the third variable no one ever takes into account when considering Buffett's advice: "just invest in broad market indexes" literally only works in the US, and only has worked historically. It's not a coincidence that the US is the youngest developed economy on the planet.

In other words: How high would US stock returns have been if interest rates were near-0% throughout the 1900s? Have interest rate adjusted returns actually decayed in the past ten years? How long before the US stock markets stop behaving "historically" and start behaving "globally"?

I'm not asserting entire bearishness on the us economy. The US is still the nerve center of global finance, software technology, education, retail spending, every economic metric you look at the US leads in. That doesn't disappear. Just that: the story of the next twenty years may be the US financial indicators trending more toward historical global norms.

zamfi4• 4 years ago

Maybe it only works in the US equity markets, but that's not "only works in the US" -- the S&P 500's companies are: not all based in the US, and in total derive only 75% of their revenues from outside the US.

For reference, the US share of world GDP is about 25%.

It would not surprise me at all if the most scalable, profitable, and growth-oriented companies ended up on the S&P 500 regardless of where in the world they started or where their revenues originate.

I'm not saying anything about interest rates -- your point there might be spot on -- but US stock markets have huge global exposure, and your implied assertion that there's some kind of "global" benchmark equity growth rate doesn't seem that sound.

ericpauley• 4 years ago

The US is at least as old as the concept of a contemporary “developed economy”, so it doesn’t seem like this part of the argument holds.

wyldfire• 4 years ago

I wonder if devastating global wars (and pandemics) over the previous century(ies) makes for a confusing baseline to construct "historic averages".

lokar2• 4 years ago

People who complain about extreme fed policy should look to congress. The inability of congress to address core economic and financial issues forces the feds hand.

Proven• 4 years ago

Complete nonsense.

The Fed isn't supposed to address any "issues", but simply be neutral.

Instead they've spent a century saving entities that socialized private losses.

kube-system• 4 years ago

The fed has a mandate to follow:

https://en.wikipedia.org/wiki/Federal_Reserve_Reform_Act_of_...

viscanti• 4 years ago

They're meant to use monetary policy to maintain price stability and keep the unemployment rate low. Lots of issues come up where monetary policy would need to react. There are many places where fiscal policy might be better (it can be more finely targeted) and we generally don't see it materialize. So we're left with central bank technocrats using monetary policy.

lokar2• 4 years ago

That is a pretty hostile reply to a neutral post.

They have sought to prevent large scale economic crisis, which would dramatically impact unemployment. And they have commented while doing so that this is not the ideal way to manage things.

LastTrain2• 4 years ago

What do you mean by “neutral”?

atlgator• 4 years ago

Independent and neutral are not the same thing. The Fed works in concert with the government (Treasury, policymakers) to balance monetary policy with fiscal policy.

drewcoo• 4 years ago

The Fed isn't supposed to address any "issues", but simply be neutral.

What the Fed is meant to do:

https://www.federalreserve.gov/faqs/about_12594.htm

Instead they've spent a century saving entities that socialized private losses.

Yes, they've been around since 1913, about a century.

Don't get it mixed up, though, capitalism socializes elite private losses, not the blunt tool that is the Fed. Before that, feudalism did the same.

Areading314• 4 years ago

Very accurate. The dysfunction of congress led to a much slower economic recovery after the GFC due to sequestration and partisan debt ceiling games. Then went far the other way with huge tax cuts, huge spending, followed by even more spending by the current admin, and claim surprise at the resulting inflation. If we do have a recession coming, we are in a very bad position to cushion it at the moment due to political partisanship.

imtringued2• 4 years ago

Low interest rates are supposed to make it easier to build new housing but instead zoning keeps getting more restrictive. People complain about Chinese investors buying up houses when they should be glad that they can use this money to build homes.

Local residents might think property values going up benefits the city but in practice wealthier individuals will be able to afford more houses and all of those increased property values exit the community when "mortals" move in and buy the house. The 700k paid on a house does not go to the community, it goes to some absentee owner/landlord in San Francisco or New York or some other major city.

lettergram2• 4 years ago

Lol “forces the feds hand”

Congress, in part because of the fed, doesn’t have the ability to regulate it. This is why Andrew Jackson originally dismantled the second bank of the United States (the irony of him being on the $20 federal reserve note is painful).

The way the fed really works is that those closest to the supply of money get a higher valued dollar. During the pandemic the fed was straight up letting certain entities have the funds first (black rock, for instance). Then they were buying junk bonds and deciding winners and losers

https://www.federalreserve.gov/monetarypolicy/pmccf.htm

Who owns the fed? Where are the audits?

https://m.youtube.com/watch?v=HRduwYgrU7A

I seriously don’t understand why congress doesn’t even bother to audit the FED. The only reasonable explanation is corruption

ihatepython• 4 years ago

The Fed is one of the most misunderstood institutions. Basically, everything you have said is completely wrong, which makes difficult to write a reply, because where to start?

In short, the original design of the Fed was correct, where each branch was independent and could set their own interest rate, and they purchased commercial paper to stimulate the economy. This changed during WWII, where the government mandated that they had to purchase government bonds to support the war.

Congress is the main problem, where they spend money recklessly with no intention of paying anything back.

The Fed is in a position where if they don't raise interest rates, they will be blamed for the bad economy.

The Fed is a convenient scapegoat, used by people who assume that Youtube videos are correct.

6274672• 4 years ago

Is the current cadre of politicians trained to set policy under high interest rate? I ask of those from main economies.

blitzar3• 4 years ago

They are not well suited to set policies under any regime.

smitty1e3• 4 years ago

The point of this silly question is to consider just how much of an outsized role the Fed now holds.

Among the overarching points of the U.S. Constitution is that people who wield vast power stand for election.

The Federal Reserve urinates all over this point.

Reforming the Federal Reserve is sine qua non IMO if there is to be any improvement.

AnthonyMouse• 4 years ago

The issue is it's not just the Fed, it's the administrative state as a whole. The President appoints the Fed board and the FCC commissioners and the DoJ and the FDA, and then they make policy though nobody elected them.

The rulemaking role of these agencies should be a subset of the legislature and the Congress should have to vote on their proposals before they become law.

thebradbain2• 4 years ago

Congress can barely agree on a debt ceiling without playing football every year.

Having them vote on the price tiers of postal service package weights or Amtrak route schedules seem like a surefire way to bring the management of every public agency to a standstill.

In fact, the only example we really have of our congress being in charge of setting rules for a public agency is the tax code— and its a mess of carve-outs, loopholes, stopgaps (AMT minimums?) that most lay people need to use a certified professional to simply perform a required function ever year. And it’s consistently subject to political football, drastic policy changes based on whatever party is in power, and core issues that congress was originally supposed to solve by running it (like supposed to balance how much money it brings in against public expenses) are often ignored anyways.

The point of a republic is not to put every decision to a vote, but to elect people we trust to be in charge— which includes who they appoint to run agencies, etc. In fact, that’s where most of the president’s power Tiber policy comes from— and it makes sense why, since he’s the only person in our government we all have a say nationwide in electing.

blockwriter2• 4 years ago

My friend that has been a general contractor for around ten years acts like it's not even worth doing his job anymore now that interest rates are going up.

thedudeabides5• 4 years ago

He's prolly right.

lambic2• 4 years ago

why is that? what kind of contractor?

bumbledraven• 4 years ago

what kind of contractor?

https://en.wikipedia.org/wiki/General_contractor :

A general contractor…is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and the communication of information to all involved parties throughout the course of a building project.

blockwriter2• 4 years ago

His firm develops multi-unit buildings in Chicago, mostly residential. I think he is just annoyed that the easy money is drying up, and that it hurts his bottom line or business in general. Based on his attitude, though, I'm just amazed that the type of project his firm takes on were so dependent on money being cheap. They also operated a lot on a fixed cost basis, and sudden price increases were not accurately factored into those contracts.

He wants without price stability and cheap money and has neither.

positr0n• 4 years ago

Interesting. I just asked the builder that built my house* and he said his business hasn't slowed down at all.

His primary location since I'm sure that matters a lot: suburbs north of Dallas.

* We got the land right before the boom in prices. Paid super inflated prices for materials. Finalized a mortgage before the recent rate increases. I guess overall we came out ahead?

markdown• 4 years ago

Finalized a mortgage before the recent rate increases.

What a privilege it is to live in a country where home loan interest rates are fixed.

mdasen• 4 years ago

I think it's going to take some time to settle a bit. Even though interest rates are high, the US is very low on housing stock and very low on labor. If there's a lot of demand for new units and very little labor to build new units, then they might not see business slow down.

Likewise, rates have dropped a decent amount from their highs earlier in the year. Zillow seems to indicate that rates have dropped around 0.7 percentage points (like 6.9% to 6.2%). I think a big issue is that people don't believe the Fed will keep rates high for more than 12-18 months. If rates are already calming down and you don't believe the Fed will make it impossible for people to buy/sell homes for the next 5-10 years, then the interest rates don't matter that much so we aren't going to see a dip in demand because people don't actually believe they'll be paying the monthly that they're signing on for.

Let's say that the Fed pushes rates 1-1.5 points higher and we see 8% mortgages. Let's say the Fed keeps mortgages at 8% for the next 5 years. We'll definitely see a huge shift in the housing market. A $750,000 place is $2,530/mo at 3%, $3,675/mo at 6.2%, and $4,403/mo at 8%. Right now, people are thinking "I have to spend an extra grand a month for a year and then refinance it." If that becomes, "I'm going to have to spend an extra two grand a month basically forever," that changes things a lot.

People's perceptions matter. Everyone is assuming that the 3% mortgage is coming back soon. I'm not criticizing those people - I also think the 3% mortgage is coming back. I think it's politically kinda impossible for it not to come back - we'd be locking a generation out of home ownership even more than they already are and we'd be locking people into their current housing since if they sold and bought a new place at the higher rate, they'd be paying so much more for the same quality housing. In the reality created by our collective perception, we're all continuing to value things at those prices.

Literally, the Fed hasn't lowered interest rates. It has continued to increase rates, but banks seem to be betting that won't last long and so mortgage rates are falling a bit.

I'd also note that the two of you might be comparing different things. You're talking about you building a home for yourself with (presumably) a 30-year mortgage. The other person might be talking about a contractor buying a house with a loan, refurbishing it over 6-18 months, and selling it. In that case, the long-term interest prospects don't matter. In fact, the high interest rates may have put a damper on how much people will pay for premium places while simultaneously making his job a lot more expensive. 6.2% vs 3% basically means $37,000 in interest vs. $18,000 for the first year. If you're looking to put $100k into the house and sell it for $200k above what you bought it for, an extra $18k expense really cuts into your profits - especially if closing costs are going to be $30,000-60,000. You might flip a place faster than a year and it's only $10-12k in interest for a 6-month flip, but regardless it's taking a sizable chunk out of your profits.

Right now, I think a lot of buyers looking at 30-year mortgages expect to refinance in late-2023 or maybe 2024. However, the Fed is projecting rates to climb from 3.8% to 4.4-4.9% in 2023 which should see mortgage rates hit 7.5-8% - with Federal Funds rates probably only returning to around 3.8% in 2024 and around 3% in 2025 (with mortgage rates sticking around what we're seeing now).

I'm skeptical simply because it's going to cause so much chaos in the housing market. Yes, the Fed is meant to be independent, but they would be effectively locking current home owners in place and making it extremely expensive for new homebuyers while stalling a lot of construction that's desperately needed.

Still, there's a definite possibility that rates will remain high. In fact, the people we literally put in charge of this are saying that rates will remain high through 2024, in their estimation (and they set those rates, but of course conditions might change which would change their minds). If/when that reality sets in, I think we'll start to see much larger impacts.

qudat• 4 years ago

Contractor we use says they’ve got a 1-2 year lead time and very busy schedules. Who knows, maybe that’ll drop off in a few years

BirdieNZ• 4 years ago

In New Zealand we have a sharp cliff of building contracts; they're insanely busy for maybe another year at most, and then nothing new is in the pipeline. Building contracts pan out over years, and interest rates flow into property prices rather slowly compared to share markets.

LastTrain2• 4 years ago

Because contractors charge you however much money you have available, which is how construction costs magically go up and down with home market values. I have a list of them I will not be using during this downturn.

mensetmanusman• 4 years ago

Just wait until we enter the ‘decades long workforce population decline’ period. Once GDP growth decreases by population shrinkage, investing will be fun again!

thatguy0900• 4 years ago

Well just keep desperately importing people from other countries, unlike Japan and Co. Or, for the other side of the political spectrum, ban abortions/birth control.

MonkeyMalarky• 4 years ago

The first option reminds me of the Netflix show 3%.

Qwertious3• 4 years ago

Banning abortions/birth control has already been tried by Romania. It was the inspiration for the book The Handmaid's Tale. In Romania today, banning abortions/birth control would be a political death sentence due to peoples' memories of the results the last time it was tried.

rayiner6• 4 years ago

While slowly turning the country into Bangladesh. Fantastic.

neilv• 4 years ago

It became the new normal, and the generation that entered Wall St. during this time is now disoriented, for they “do not know a world without cheap money.” [...] Whenever people are humbled by the melting away of things they took for granted, now that’s a topic worth exploring.

I'm trying to figure out parallels and implications for tech jobs.

Where in tech jobs will be first to decide they need to "rediscover the ways of our ancestors", and willing to pay to speed that up.

mitthrowaway29• 4 years ago

Low interest rates created a preference for subscription models over up-front sales. It may have felt like the transition to cloud software and subscription pricing was due to technology shifts or mobile phones, but it was probably driven by interest rates.

If higher interest rates stay around for the long term, it's quite possible that tech going forward will be a little more like the '90s: An up-front sticker price, plus an extra charge for support. Ad funding (as a continuous revenue stream) may also get somewhat less powerful, but will still be a big deal.

colinjoy• 4 years ago

Given how subscription models are also pushed down the throat of consumers, who do not want them, I would believe that the love for ARR plays an even bigger role.

EdwardDiego• 4 years ago

I'm waiting for the inevitable swing back from the Clouds to colos and dedicated DCs. Eventually, the cost difference is going to get a bunch of CTOs twitching.

I mean, the fact that "cost engineering" is an often used term these days makes me sad.

WrtCdEvrydy• 4 years ago

In the background, it's already happening for test and dev environments.

The technical term is "repatriation" and I can tell you those snowballs coming from S3 to your onsite aren't just for looks ;)

spaceman_20208• 4 years ago

I feel that a lot of startups would never be possible in a low interest rate environment. If you were trying to start Uber today and told investors that you'll lose money on every ride for fifteen years straight, and that you will burn through $35 billion without showing a profit, you will likely be laughed out the building.

shash• 4 years ago

I think you mean a high interest rate environment? Higher interest rates mean more risk?

Also, when they started, I don't think Uber told their investors they'd burn through $35 billion and lose money on every ride...

CoastalCoder• 4 years ago

"What if your entire worldview was just because of near-zero interest rates?"

Worldviews typically include who we are, why we're here, what purpose (if any) we have in life, etc. It seems strange to me that someone's worldview could be thoroughly based on interest rates.

vermilingua• 4 years ago

You (thankfully) mustn't know many crypto/optionbros.

balsam• 4 years ago

The worldviews of the originators of HN and YC are probably built on cheap debt. Airbnb may have revenue, but I would say its their stock sales to speculators, also burgeoned by cheap debt, that resulted in these VCs thinking they are smarter than everyone else. Now that they are smarter than everyone else, their purpose in life is to tell people what they should do, how they should live, like the puritans of old. Get frustrated by other smart people who didn’t get their self-assurance from God or Market given prosperity. Thats a worldview ain’t it.

sennight• 4 years ago

Worldviews typically include..

For people who are their own favorite subject, maybe. For everyone else it is an internal model of the way the world works, which allows you to make sense of things. So when you are interested in the way the world actually works, not how you feel it should work, economics is very important.

mym1990• 4 years ago

I think the question aims to say that one's world view, which is a combination of your experiences, interactions, and learnings...might be based off of the adverse effects of zero interest rates(things happening around you or to you) rather than one's world view being solely based off of an understanding of interest rates(which I am pretty confident that most people don't have any deep knowledge about).

mclightning2• 4 years ago

People's concerns start from food, housing and many other immediate pressing issues, before it gets to identity and purpose. (i.e. Maslow's Hierarchy of Needs)

It is not very possible to buy a house with high interest rates. So, most of your earnings go to rental cost.

You shape your life with what you have left to spend.

Tade0• 4 years ago

Hailing from a country with a weak currency and high, volatile interest rates I'd say this environment produces a certain disgust towards borrowing money.

This is further reinforced by past, ultimately disastrous attempts at going around the problem of high interest rates, like taking a mortgage indexed to CHF.

And it's only going to get worse now that interest rates ballooned to values unseen for a decade in a span of months.

Guthur• 4 years ago

Western economies are thoroughly capture by financiers and US dollar hegemony and in particular the petrodollar.

All of these converge to push up asset prices irrespective of actual productivity.

The world has had no option but to buy US debt and or non controlling stakes in US companies. All of this has allowed asset prices to explode while the productive economy and our standard of living has stagnated or declined.

rayiner6• 4 years ago

I suspect near-zero interest rates for a decade also contributed to the political realignment of affluent suburbs trending Democrat. So long as the Fed would buy federal debt cheaply and there was no significant inflation, Democrats could advocate multi-trillion social programs while promising to maintain Reagan-era tax rates on even quite affluent folks.

mc32• 4 years ago

I want to know what happened to the promised "Peace Dividend". Military spending was supposed to go way down, not just down, and civilians were supposed to reap the benefits... Instead Industrialists took up the Globalization mantra and forgot the little guys (the guys and gals working in factories) and happily told them it would mean lower cost of living --conveniently leaving out that they would also earn much less, if they even got to keep their jobs.

Ross Perot and Bernie Sanders warned people, but they were made fun of and now Bernie has sold out and pretends.

roflyear3• 4 years ago

How did Bernie sell out?

SilasX• 4 years ago

I’m not sure it’s fair to say Perot was laughed at. He commanded a tremendous following, and got 19% of the vote in the 1992 election, without a major party endorsement, and after hamstringing himself by leaving the race and re-entering.

https://en.wikipedia.org/wiki/1992_United_States_presidentia...

andrekandre• 4 years ago

  > now Bernie has sold out and pretends

in what way?

cma• 4 years ago

Am I misremembering or.. didn't republicans with full control of congress do the tax breaks while increasing spending and later, in partnership with dems after losing congress, expanding social programs like Obamacare to be more universal (free pandemic-related care)?

Biden's eventual infrastructure bill also was smaller in scope than Trump's proposed one that wanted $2 trillion instead of $1 trillion.

miguelazo14• 4 years ago

What multi-trillion dollar social programs? What country are you talking about— I want to live there, sounds a lot better than the pittance we have in the US. Unless you think the Defense Department is a social program.

areyousure3• 4 years ago

The reference is possibly to the Green New Deal or to Build Back Better. Both probably qualify as "multi-trillion social programs", but perhaps the former fits the description better.

llanowarelves2• 4 years ago

Also over $4 trillion between CARES Act and the "American Rescue Plan".

Do you feel Cared about and Rescued?

JamesBarney• 4 years ago

Social security + Medicaid + Medicare is in the trillions.

rayiner6• 4 years ago

Social security and Medicare are each individually trillion dollar social programs. We also just had $2.5 trillion in covid related expenditures to individuals and families and healthcare: https://www.nytimes.com/interactive/2022/03/11/us/how-covid-.... Also, as I said, Democrats have been advocating trillions more in social spending (universal healthcare, etc.)

I’m not knocking any of that. But American Democrats are probably the only center-left party in the developed world who advocates for expensive social programs while promising not to raise taxes on people making up to $400,000 a year. My point is that this is a unique outgrowth of the fed’s money printing machine.

neilwilson11• 4 years ago

Given that putting interest rates up is an artificial intervention into the market for money, what if your worldview is based around allowing financial institutions to extract rent by taxing people for setting up home?

Why is setting the price of money artificially - which gives free government money to financial institutions - better than the alternative: setting the base price of labour by guaranteeing people a job?

It would be better if we stopped talking about the false dichotomy of fiscal and monetary policy and started talking about stabilisation policy instead.

mitthrowaway29• 4 years ago

For what it's worth, I don't fundamentally disagree with the MMT viewpoint that you're coming from. But it's not so clear cut.

gives free government money to financial institutions

By this, the parent means that nonzero interest rates on government debt represents "free money" that the government pays voluntarily even though it doesn't have to.

I'm not so sure. First of all, most of the institutions getting these payments hardly seem happy to be getting them, and would much rather see interest rates drop.

Secondly, the money does not come free to the recipients. It comes with a very high opportunity cost. That's exactly the point, because it's an attempt to encourage people to save money when they'd rather spend it because inflation is high.

A job guarantee sounds nice, and I do think we should be encouraging full employment without worrying about wage growth. But with a jobs guarantee, who decides what the job is in service of? The point of not having a command economy is that price signals should influence such decisions.

neilwilson11• 4 years ago

"That's exactly the point, because it's an attempt to encourage people to save money when they'd rather spend it because inflation is high."

Except that can't happen can it.

If Loans create deposits, then to get more savings, you need more loans. You can't have one without the other.

What they are trying to do its get people to pay off loans. How many people do you know who pay off loans in the middle of an inflation?

neilwilson11• 4 years ago

"But with a jobs guarantee, who decides what the job is in service of? "

Doesn't matter (ultimately it is a political choice). The point of the job is to use up hours so you can't use them yourself. It forces the spending of time - which is the actual underlying exchange amount.

If you give up your time for others, then others will give up their time for you.

t0suj44• 4 years ago

From my parents' experience guaranteeing people a job will only result in people idling at job site because there is no work to do instead of people idling at home or possibly studying for a job they want to do.

Giving artificial jobs don't differ much from giving people artificially valued money.

Krisjohn• 4 years ago

Look around when you're outside and take notice of all the maintenance not being performed. Speak with people who have a job and see how many of them would describe their workplace as chronically understaffed. We're a long way away from "people idling at a job site". And even if we weren't, there's a cost to idle tasks that sit around waiting for someone to be available to do them.

That said, only a small percentage of workers are happy to be pointless. Punishing everyone over the few hypothetical lazy does more harm than good.

reverius422• 4 years ago

Except there is plenty of work to do in public infrastructure, if the government is willing to spend money on getting it done: roads and bridges crumbling, water treatment systems in dire need of maintenance and repair, power grids fluctuating and unable to handle peak loads. And lots of second order work: administration of, and job training for, these infrastructure projects comes to mind.

lmm2• 4 years ago

It's harder for a few at the top to monopolize all the jobs than all the money.

ako• 4 years ago

First time I came to the US over 25 years ago, one thing I noticed that was really different from western Europe was the amount of artificial jobs: grocery store bag filler, elevator boy, parking place guard, etc. I hadn’t seen these in Europe for years, cause nobody needs them. Having first visited Eastern Europe during communism, the resemblance in this aspect surprised me.

neilwilson11• 4 years ago

"Giving artificial jobs don't differ much from giving people artificially valued money."

There's a big difference. It uses up the hours so they can't self consume them. And they are forced to turn up on time, and stay the day - or they don't get paid.

Which goes back to the root of our exchange system. We don't really exchange money, that's just a token - we exchange the output of our time, which is finite, and therefore valuable.

A job is a way of giving up your hours for the benefit of others.

PeterisP3• 4 years ago

I'd rather say that keeping interest rates down required a continuous artificial intervention into the market for money - the current rate rise seems quite fully driven by reasonable market pressure, not by some artificial intervention.

neilwilson11• 4 years ago

If the central bank doesn't set a rate, then the interbank rate will drift to zero - because money is near costless to produce and no chance of non-payment because there is only one central bank in a currency and central bank money can't go anywhere else.

That doesn't stop the rate for lending to businesses being higher than that because there is a risk of non-payment there. There is more than one commercial bank.

Every form of money has its 'own' rate. There is no One Interest Rate to Rule Them All - contrary to neoliberal myth.

constantcrying• 4 years ago

All interest rates set by central banks are an intervention into the economy. A central bank has the purpose of intervention.

setting the base price of labour by guaranteeing people a job?

Minium wages are setting a floor to the cost of labour. "Guaranteeing jobs" is totally meaningless inside a somewhat capitalist system. People work if and only if there is an employer paying them a wage the person deems adequate for the job. If a person wants a compensation nobody is willing to offer they won't get a job. The only thing the government can do is either create fake jobs for the person to do give them welfare, which are the same thingv but the later is far simpler and cheaper.

throwawayftx• 4 years ago

Print more and dump on the world strategy will end in the near future since big countries are planning to ditch trade in dollars. Funnily monster that the west created is about to eat it alive.

spaceman_20208• 4 years ago

Ray Dalio says that we are entering an era of currency competition. Instinct tells me that he is right.

chii2• 4 years ago

When the GFC happened, there's also a lot of people claiming that it's the end of the dollar hegemony.

benjaminwootton5• 4 years ago

I definetly think a lot of the startup world view is just a function of low rates.

Startups could run for decades with $billions in losses and only a passing focus on eventual profits.

All of those losses flowed into the bank accounts of big tech (via AWS credits, Google and Facebook Ads).

All of the high salaries, employee expectations and leverage in tech startups and big tech derive from that spigot of cheap money.

What if it was all just an illusion for a few decades? It’s going to be a bumpy readjustment when it’s all that most of us have known.

miguelazo14• 4 years ago

It has skewed the labor market to an insane degree. So much talent went into idiotic pursuits, and away from anything that had to do with public service.

spaceman_20208• 4 years ago

My wife's uncles is one of the top doctors in his field in the country, and was the head of department in the country's top medical university.

He makes less money than me, even though I'm 35 years younger and my "skills" include some basic coding, some marketing, and some understanding of social media. Whereas this man has spent nearly 50 years in the medical field and has treated multiple presidents.

None of the startups I've consulted for are profitable. Most, by all means, will never be profitable.

Meanwhile, my maid, who works harder in a day than I do in a week, makes 1/50th of my annual income.

All that free money has seriously misaligned societies incentives. Enrollment in the medical field is falling drastically because no one wants to work years to make less money than some 24 year old with two years of coding experience.

I'll be okay with a pay cut if it means a more equitable, more fair society.

TimPC2• 4 years ago

Talent doesn’t go into public service anymore unless they have extraordinarily rare values. Even if tech salaries get cut in half they’d be a good deal higher than government salaries. Working a government job in the Bay Area means accepting a well below poverty line income. The room for advancement is also terrible as non-management engineer tracks top out above $600k in the private sector if you never make distinguished engineer and in the millions if you can. Meanwhile the CTO roles in important government organizations often list in the $140-160k range. A 2% pension only goes so far. Some of us actually want to own homes.

If government actually wants talents it needs to be realistic about what the market is and take some money out of the insane amount it spends on contractors to pay accordingly. It also needs to build a culture that lets it hire well and lets it fire when it makes mistakes.

Animats• 4 years ago

I definitely think a lot of the startup world view is just a function of low rates. Startups could run for decades with $billions in losses and only a passing focus on eventual profits.

Yes. Buying growth at a loss is so over.

A stock is worth the present value of future dividends.

IncRnd2• 4 years ago

A stock is worth the present value of future dividends.

Not every stock pays dividends. A stock's worth is determined by supply and demand in a market or directly between the seller and the prospective purchaser.

andsoitis• 4 years ago

A stock is worth the present value of future dividends.

A more accurate thing to say would be that a stock is worth the present value of the future earnings the company generates divided by the number of outstanding shares.

Since the future is unknowable, a stock price is hence derived from the expectation of future earnings.

geysersam7• 4 years ago

a stock is worth..

Hasn't this always been the case?

Genuinely curious.

FooBarBizBazz• 4 years ago

You don't need to pay a dividend to return value to a shareholder. You can also tacitly agree to buy back the share later at a higher price. Since this is taxed as LTCG instead of as dividend income, this is incentivized by the tax code.

raffraffraff• 4 years ago

If cheap credit is at an end I can see a lot of small companies and hobbyists losing free-tier services. I don't know how companies like Gitlab can give away so much functionality for zero money. One startup I worked at operated for years on free tiers and spent nothing on version control, CICD, CDN, remote access, authentication, email, chat, video conferencing etc.

I don't want that dream to end, of course. I make use of free-forever services. I just don't see it lasting if we get to the end of cheap credit.

semi-extrinsic• 4 years ago

Well, for all of those things, what is expensive for a small company if you run it yourself is the sysadmin aspect. You could run all these services off of a pair of three-year-old servers from ebay for next to nothing in hardware cost, even if you buy cold spares for disks and fans and power supplies from the get-go. But the cost of having someone learn to install, configure and operate all this software is very significant.

But when you're at the large scale and offering this as a commercial service, you've designed your free tier such that the marginal cost of adding a free tier customer is essentially zero, and the best way to acquire new customers is to have someone in that org using your product's free tier for their personal projects.

1vuio0pswjnm7• 4 years ago

"What if it was all just an illusion for a few decades?"

Reminds me of a relatively new term that has become popular, "gaslighting", especially on the internet. If "tech" companies and their investors can convince people the illusion is a reality, then they can keep the racket going longer. Seems this was quite easy. As long as the cheap money was flowing.

As middlemen watching over the internet, now a primary means of human communication, "tech" companies are in an ideal position to create and manipulate "narratives". I am astounded by the ridiculousness of the arguments I am seeing from what we consider major corporations like Google in response to their infractions. It is apparently fair game to argue anything in support of their racket continuing.

What about this term "disruption". How much of that relied on low interest debt more than "technology".

IMO, there is a difference between making money and raising money. Those invested in "tech" startups like to conflate the two. Employees of "tech" companies being paid indefinitely from investment capital rather revenues, groups of computer nerds which never achieve profitability in the market,1 believe they are "earning" their salaries.

IMHO, raising money and earning money are different practices. The "tech" nonsense is an excellent illustration of how the former does not necessarily lead to the later, and, aside from those whose job it is to raise money, e.g., VC, only the later can be considered a measure of career "success". The two should not be confused.

1. Unless perhaps they sell advertising services or otherwise collect and exploit data about and/or obtained from computer users. As rates rise, wasting money on internet advertising will likely decrease.

Back in the 80s, I used to see those TV ads with John Houseman for Smith Barney and feel somewhat skeptical.2,3 "They earn it." Yeah, right. This was after all the time of "Liars Poker". Now when I look back, those ads seem remarkably admirable, closer to the truth, probably only because of how ridiculous the situation has become today.

Imagine a "tech" company proclaiming they make money the old-fashioned way, by earning it. Meanwhile they have no profits and they are paying salaries from VC money. Nice illusion.

2. https://www.linkedin.com/pulse/we-make-money-old-fashioned-w...

3. https://www.sanfranciscoschoolofcopywriting.com/great-ad-cam...

moose_man2• 4 years ago

This dude is complaining about the 1990s. Low interest rates are a factor behind a lot of trends in the startup world, but CEO stock pay, stock buybacks ect, a lot of this is 1990s era trends.

RayVR2• 4 years ago

I just can’t take this person seriously. Clearly written by a non-expert and the questions/ideas are, as a result, well-trodden ground without anything original to add.

Take this representative quote “It’s Jerome Powell’s world: never before have I seen markets move so erratically in response to a once-boring Jackson Hole conference. Actually, the first time I ever heard of this event was this year since some acquaintances of mine were trying to ‘trade’ it.”

So, essentially, this person had no clue what Jackson Hole means in the financial world but makes a huge judgement on past events, then says immediately they know nothing of the past and just learned of them this year. No analysis of market volatility around these events, just a blanket statement that makes them look foolish.

Basically they are now opening their eyes to the huge role central banks play in the economy.

moose_man2• 4 years ago

He's right in one sense, that the implications of Fed policy for the last decade are truly astounding, but I'm not sure he actually understands why he is right.

RayVR2• 4 years ago

It’s a discussion that’s been had countless times and written about almost as often.

maybe I’m gatekeeping a bit but I also think the amount the average person understands about share buybacks and their relationship to ceo compensation packages, interest rates, and corporate tax law is lacking and this person has not improved that situation and probably hurt it through their own ignorance.

That’s just one of many issues with the article.

benjaminwootton5• 4 years ago

As someone semi familiar with this stuff, it is fairly notable how rates are moving markets right now.

Say the payroll number misses consensus by 5%, meaning there’s a fraction of a percent less chance of a 0.75% rise in rates vs 0.5%. The stock market then rallies by 2% or a few hundred $billion in market cap.

Surely that isn’t a healthy market when changes in fractional rate expectations create so much volatility.

blitzar3• 4 years ago

As someone semi familiar with this stuff

Your comment suggests the opposite.

hef198984• 4 years ago

Just yesterday I commented something about the disconnect between huge parts of the population (or at the very least those on social media and the internet) and just how the basic, underlying things in our society work. Seems this submission is just another, great example for this.

The recipe is always the same: lack of basic understanding of things (economics, law, finance, supply chains, medicine, science,...), a certain level of eloquence, full certainty to be able to work out everything based on first principle, no curiosity or intention to do some basic research into topics and a huge drive to look smart / proof to the world how smart you are. Easy to spot so, for example by sentences you pointed out.

antonomon6• 4 years ago

While I try not to comment to 'defend my views' because it's a bit lame, I have to plainly say I am not "just opening my eyes to the huge role central banks play in the economy." I have been following markets many years, both as an investor and because I enjoy reading about economic history (also as part of my study).

My whole point with that sentence was - did you ever pay attention to a Jackson Hole conference before say 2022/2021, which was previously a relatively bureaucratic non-event? I certainly didn't, and now suddenly so many people around me were trying to trade it and the S&P500 moves 5% a day on it. That's the only point of that sentence, but you seem to be extrapolating much more from it... including whether or not I even deserve to write.

And are you really saying that not knowing of a Jackson Hole conference is indicative of 'not knowing anything about the past?' or whatever it is you meant there. Either way, that's just ridiculous gatekeeping of knowledge of financial markets and history based on a useless, pidgeonholed criterion - like whether or not someone is familiar with Jackson Hole.

If you didn't like the article, that's totally okay, but don't be so arbitrarily dismissive.

jsmith992• 4 years ago

Are you the writer? In what way was the rise of Vanguard driven by cheap credit?

mjburgess• 4 years ago

If it helps, they weren't talking to you.

As soon as you put something out there in the world people are going to have conversations about it, with their own temperaments, that they'd never have with you.

You can take that personally, or realise that their comment really has nothing to do with you nor is meant for you to read it.

sph3• 4 years ago

Apart from the ad hominem, what is your actual, informed rebuttal then?

boppo114• 4 years ago

But is his conclusion wrong?

jongjong3• 4 years ago

I've been saying this for the last 5 years. People don't realize how powerful the 'money printer' is. All the money which exists in the system was created out of nothing and injected into the economy through a few specific channels (mostly as credit backed by debt). IMO, everything in modern society is influenced in some way by interest rates; even culture and morality. Money printing can distort the market pricing mechanism and distort all economic activities.

IMO, a low interest rate environment is about luck, first mover advantage and media exposure. A high interest rate environment is about value creation. IMO, as interest rates increase, many successful people of the past decade are going to wake up to a new reality; those who have the humility to understand that they were lucky will be able to adapt their strategy to suit the new environment but most will go out of business.

I believe that in this new high interest environment, some people who were previously unsuccessful will thrive while some who used to be successful will start failing. The majority of investors will not be able to escape the mindset that they should only invest in successful people (since that has worked consistently in the past) and they will end up chasing loss after loss and not understand why their proven strategy of track-record-based investing is no longer working.

benjaminwootton5• 4 years ago

I agree with your thesis that genuine value creation will become more important.

I think this is a more exciting market to operate in as opposed to one where we simply need to raise and spend cash as quickly as possible.

jongjong3• 4 years ago

For the first time in my career I'm also feeling cautiously optimistic about the future.

I'm one of these people who was absolutely terrible in this low-rate environment. At least I got to learn about some of the reasons why I absolutely suck at it.

One of my worst character traits is that I'm missing the hair-trigger opportunist factor (AKA "you've got one shot" factor) and this is precisely one of the traits which was rewarded heavily by the low-rate environment since it tends to reward first movers disproportionately.

boppo114• 4 years ago

genuine value creation

But how do we even know what this is anymore? With more than half the wealth accumulated by the top fraction of society it seems like ultra-luxury goods are going to be the most profitable, but surely that's not actually genuine value creation.

And have we strayed too far to achieve that without austerity? How will we pay interest on the national debt?

nobrains• 4 years ago

I refer to this as the US 3rd nuclear bomb.

Most countries hold USD reserves/bonds.

If US prints money, the wealth of all countries holding USD goes down. While the wealth of US increases.

Since US started this monetary policy of easy money printing, they have been "bombing" the rest of the world, violence-free, ammunition-free and uranium-free.

I am not an American, but if I were, I would be pretty happy about it. Yes, it would affect me and my neighbors, but in the end I would be getting a net benefit.

The real beauty is how the other countries don't even fully realize this is happening to them and the people who do realize (finance ministries, central bankers, etc.) are kept rich enough to not talk about it too much.

bagels4• 4 years ago

They are trying to replace usd as the reserve currency.

tomcam2• 4 years ago

If US prints money, the wealth of all countries holding USD goes down. While the wealth of US increases.

True, yet average Americans lose out because their savings get eaten away by inflation

notahacker6• 4 years ago

People in other countries usually have freedom to minimise their US dollar holdings, holding their wealth in pesos, rupees or lira instead and only obtaining dollars for specific transactions.

But they don't, because they'd lose a lot more wealth if they held it in pesos, rupees or lira than USD.

In fact the story of the last decade has been one of significant increases in the purchasing power of wealth held in dollars compared even with currencies of reasonably stable Western developed economies.

tasuki• 4 years ago

All the money which exists in the system was created out of nothing

People keep saying this. But hasn't it almost always been true, almost everywhere? Apart from some rare exceptions, such as people using livestock as money.

MomoXenosaga• 4 years ago

A bunch of smart Dutch people got the idea of asking people for money which they would pay back with future profits.

This managed to fund a war with the Spanish empire that owned almost all silver mines.

Paper won against hard currency. And the rest is history.

ngcc_hk• 4 years ago

You are naive as the m3 is not just m1. The original thinking is that once increase the base it has to cut back. It never did and for some reason (china) the inflation never came! It was until the pandemic underway and masked so much that the world except USA has too late to control the inflation. And putin is not helping. And that firm did not die especially big one does not help, just like russia and later china.

The idea that interest rate has to be at least 2% above the inflation will cut and hurt. It is not about the 0 interest rate. But the inflation and the difficulty and having the political will to let the central bank (and they have the clear head) to do the right thing, guy.

So far only USA seemed working. And if war in Europe and later in pacific rim ongoing, once again we have USA.

landemva2• 4 years ago

adapt their strategy to suit the new environment

Yes, am raising cash and looking for US government debt to go 10%+ to lock in some sweet risk-free yield.

Eddy_Viscosity2• 4 years ago

We are barely ticking up to moderate interest rates, I doubt we will ever see high interest rates ever again. Though it'd be interesting to see if your thesis is true.

forgingahead• 4 years ago

I'm old enough to remember in university economics class, the professor would joke about how financial media would closely watch press conferences that Alan Greenspan would give after FOMC meetings, down to watching the thickness of the briefcase to guess as to whether the fed funds rate (which determines interest rates) would increase or decrease.

I am happy rates have risen, and I hope they stay at a sane level more in line with historical values rather than the insane period of the past 14 years. As another commenter here points out, when rates are not-zero, business defaults back to value-creation, instead of other silly game-the-system metrics that have arisen in this time frame.

Of course it will be painful, both for a generation of younger people who have never experienced "high rates", and also for the finance "professionals" who built reputations on nothing more than gaining access to easy-money and deploying them randomly to things which only rise in value because others also pumped in easy-money down the line. It may also address some of the woke-time-wasting initiatives at companies, as anything not actually adding value will be dropped.

The main thing will be to see if the Fed actually stays the course, or if the allure of the money-printer is too seductive and they decide to drop rates back down again even after (or worse, before) inflation is tamed. If so, then the currency will continue to debase until the crypto exit is inevitable.

boppo114• 4 years ago

Can you point me in the direction of something that explains the mechanics of how the FFR determines (prior to market sentiment) the rest of the yield curve? I know they do, but most explainers stop at that.

baandang2• 4 years ago

How many people under 35 know that Greenspan held an "emergency" Fed meeting in 1994 to RAISE rates 25 bps?

This idea the Fed exists to print money and keep rates low is just not reality. This is over extending the recent past as some kind of stable process.

This is going to be extraordinarily painful. So much of the economy, risk preferences, expectations have over aligned to an unsustainable zero interest rate environment that is gone for a generation. The biggest bubble ever popped last year if you look at Wilshire 5000 vs GDP but most people don't even realize we were in such a massive bubble yet.

We were not talking about the dot com bubble in summer 2000 either though. We were just talking about how do we get back to the bull market. We are still at the denial stage.

lamontcg3• 4 years ago

What if you're just too young to remember a business cycle because you weren't an adult or were still in college so were insulated from 2008?

Its funny to read all these takes from "kids" who think that all the fundamentals have totally changed at this point like the economy has turned some fundamental 180 degree turn and we're heading back towards >6% rates forever.

It hasn't. The Fed is going to crash the economy into a brick wall to bring down inflation via raising unemployment (we're probably still 6-12 months out) but then the Fed will slash rates in a panic and go "oopsie". This will bring back yet another low interest rate / cheap money period.

I suspect the next cycle will be shorter and a decade of ZIRP won't happen again, but we're going back to ZIRP again once the recession hits.

blitzar3• 4 years ago

Born in the 80's I see. Complaining that people born in the90's have seen less than someone born 10 years earlier.

There are people born 20 years before you that have seen 2x as much.

lamontcg3• 4 years ago

Born in the 80's I see

incorrect.

notahacker6• 4 years ago

What if you're just too young to remember a business cycle because you weren't an adult or were still in college so were insulated from 2008?

This. Whole article is trying to blame a whole lot of trends which were already very much present in 2008 (and in some cases specifically responsible for 2008) on what happened afterwards when interest rates were lower

It's not low interest rates that make people believe that Uber has a route to profitability (higher interest rates might kill off some small-margin businesses reliant on debt funding and reduce valuation of all companies; they won't make people investing sovereign wealth funds in US equities smarter about which companies they allocate their funds to), and higher interest rates certainly aren't going to encourage companies to reinvest their cash piles in R&D or help new market entrants compete away the monopoly power that generates those cash piles

baandang2• 4 years ago

We are not slashing rates, that is not going to happen.

Those times are over. We can not slash rates without inflation becoming a larger issue. We had a nice run but this is back to the historic norm that inflation is always lurking in the background and highly constraining on central bank policy.

You are just repeating a standard narrative that is almost certainly wrong. 6-12 months out a mild recession happens and then the Fed slashes interest rates and the market takes off.

I personally suspect this is all a form of denial of how ugly the situation is economically. Once inflation catches a spark it doesn't just go out because basically everything economic in terms of a recovery is inflationary.

lamontcg3• 4 years ago

Those times are over. We can not slash rates without inflation becoming a larger issue.

If unemployment is pushing 8% they certainly can.

Once inflation catches a spark it doesn't just go out because basically everything economic in terms of a recovery is inflationary.

This is nonsense. If the economy is in recession and unemployment is at 6-8% then we won't be in a recovery and it won't be inflationary. It will wind up blowing up another asset bubble, but they don't care about that, which is why economists distinguish between inflation and housing appreciation.

The pandemic recession was way too brief and v-shaped and was heavily cushioned by all the stimulus. That won't happen next time. That isn't the new pattern of recessions.

LarsDu883• 4 years ago

The folks reading this are going to get the wrong message. They are going to believe that rising interest rates will magically make it so that the most highly valued companies are the ones that produce the most societal good. This may start to happen more to a certain extent, but it's a totally false assumption.

The most valuable companies before and after this era of low interest rates were and continue to be monopolies. That's what Warren Buffet invests in (Davita Dialysis, Exxon, Apple, rail lines ---> all monopolies). That's what Peter Thiel tries to invest in (Zero to One). That's what successful Y Combinator companies ultimately strive to become.

Societal value creation is not the same as value creation to shareholders. The latter can be achieved by the former, but the former is not a requirement for the latter.

The question for many of the readers of HackerNews is whether their jobs (mostly as software engineers) ever needed to exist. The answer for many is going to be -- probably not. On the flip side of things, lowering wages for software engineers is going to enable many institutions and companies that do not operate as tech monopolies or startups to start to get some of the benefits of skilled software engineers!

huijzer5• 4 years ago

That's what Warren Buffet invests in (Davita Dialysis, Exxon, Apple, rail lines ---> all monopolies). That's what Peter Thiel tries to invest in (Zero to One). That's what successful Y Combinator companies ultimately strive to become.

Buffett invests in companies with a durable competitive advantage which is also often called a "moat". A monopoly is a situation where there is no competition. As a counterexample, although I agree that Coca-Cola has unfair advantages, such as brand name and economies of scale, over new competitors, they do not have a monopoly.

The most valuable companies before and after this era of low interest rates were and continue to be monopolies.

That's not necessarily true. The most valuable companies, that is, the companies with the highest valuations are those which make the most money. Or, as Joel Greenblatt puts it: "Price follows earnings." If you want to buy a barn which very likely earns 10 mln per year for now until 2032, then a fair price would be at least 10 x 10 million discounted for the fact that money today is worth more than money tomorrow. Then, after 10 years you still own a farm and any extra income that is produced by it. Of course, this value fluctuates a lot depending on all kinds of factors, but this is generally the process that value investors use to determine the fair value. In the long run, it works as you can see when looking at the net worth of value investors such as Buffett. The only thing that a monopoly "does" is that it makes it easier to predict what the future earnings are going to be.

What is typically the case after bubbles is that people take actual earnings into account again. During speculative bubbles, it is very hard to buy things based on reasonable future earnings calculations. The price is driven purely by speculation. What historically has happened after bubbles is that prices become more reasonable again. That's why big companies with unreasonable valuations such as Tesla and Cloudflare have gone down respectively 55% and 62% in price in this year while big companies with more reasonable valuations such as Macy's, Citigroup, or JPMorgan have gone down only 20%.

Societal value creation is not the same as value creation to shareholders. The latter can be achieved by the former, but the former is not a requirement for the latter.

Agreed. Capitalism is a ruthless and terrible system, but better than the alternatives.

On the flip side of things, lowering wages for software engineers is going to enable many institutions and companies that do not operate as tech monopolies or startups to start to get some of the benefits of skilled software engineers!

Agreed!

LarsDu883• 4 years ago

Brands/Companies that Coca-Cola owns: - Sprite - Fanta - Dasani - Powerade - smartwater - Minute Maid - Fuze Tea - schweppes - Simply - Honest - innocent - fairlife - Georgia Coffee - Costa Coffee - Topo Chico - Aquarius - AdeS - Fresca - Barq's - Dogadan - Peace Tea

The list goes on. Anti-trust makes it virtually impossible to actually have a real "monopoly". Coca Cola lives in duopoly with Pepsi and other major beverage conglomerates, but the idea is the same. Having a "moat" is no different from having a monopoly. New players get in the soft drink game with the goal to get acquired down the road, no different from silicon valley startups burning money to get acquired by Google or Amazon.

LarsDu883• 4 years ago

the companies with the highest valuations are those which make the most money

In a perfect competition landscape, the net profit of players goes to effectively near zero. It doesn't matter if you're making sweaters or jet engines, this virtually a law of economics. The companies which have the highest valuations are those which make the most money (by eliminating competition).

r_hoods_ghost• 4 years ago

I think a lot of HN adjacent engineers are going to have a rude shock over the next few years as there are several pressures working against them. The first is that companies that have been trading debt for growth are not sustainable in a high interest rate environment. The second is that the shift to working from home has meant that employing remote teams, be they in other areas of the states or overseas has become much more normalized. Why would you pay Bay area salaries when you can employ just as qualified people elsewhere for less?

bagels4• 4 years ago

I completely agree with this. COVID + everyone refusing to go back to the office means nobody needs to be in a specific place anymore. I've changed my hiring strategy to cultivate talent elsewhere and pay 1/3 of what is paid in the US.

TimPC2• 4 years ago

As a software engineer a good part of my job is communication and having that communication come with an eight hour time zone shift would substantially impede the job. Yes you can hire remotely if people are working largely the same hours or hours with substantial overlap. Hiring from cheaper parts of the world across an entire ocean isn’t going to work for the same reason you can’t get hired for a day job and work a night shift.

HenriTEL• 4 years ago

I'd argue that 1. Software continues to be critical in any part of the economy. 2. People continue to spend more and more time online.

So maybe many of the existing companies we work at will require less workforce but I don't see how the software engineers market can reverse in terms of offers/demand ratios anytime soon.

ygouzerh• 4 years ago

The central banks are controlling the rates, but they don't have so many freedom in doing so then we think. They need to think about inflation projection, consumer spending, geopolitical factors,... They seems more responding to the environment than dictating the market.

EGreg• 4 years ago

Perhaps Austrian Economics has something to it after all:

https://m.youtube.com/watch?v=d0nERTFo-Sk

andirk• 4 years ago

Borrowing money can be expensive. It's also how we get to the next level.

huijzer5• 4 years ago

The 2010s were a decade that “disrupted everything but resolved nothing,” as Andy Beckett wrote, and I tend to agree.

These kinds of sentiments are great for drawing attention and might be true on a macro level, but I do not agree at all. Although there is currently a lot of nonsense going around, there are also great things going on if you look carefully.

For example, I think that electric cars do have their problems about battery minerals and such, but the idea that we can use solar and wind to locally put energy in the car is mind blowing. Some car makers, such as Lightyear, Sono Motors, and Aptera, are actually putting the solar panels on the car itself. Also, cars like the BYD Seal can drive 550 km / 340 miles on one charge and go from 0-100 / 0-60 in about 5 seconds for 35 000 dollars.

Furthermore, SSDs and processors have come a long way since the start of 2010. EUV systems are producing chips below 10 nm. Partially due to this, HDDs cost less than a cent per GB nowadays while SSDs are at about 5 cents per GB according to https://diskprices.com. The Crucial 1 TB costs 53 dollars! I've looked in my order history and payed about the same for a 120 GB SSD in 2016.

Also, note that GitHub was founded in 2008. Although I'm not so optimistic about the vendor lock-in taking place, I am very optimistic about the quality of the work. For example, Rust appeared for the first time in 2010!

Finally, what also makes me optimistic about the future is what Michael Dell stated nicely in a commencement speech (https://youtu.be/sIyGA1MlbwY). He said he is optimistic about the future because he has never met such an involved younger generation who care about the world and care about changing it. I think this also holds more generally, for example, since 2010, climate change is taken much more seriously (for example, see https://news.gallup.com/poll/1615/environment.aspx).

So no, I do not agree at all with the "resolved nothing" sentiment. A lot of bad stuff happened for sure, but a lot of great stuff happened too.

sph3• 4 years ago

I don't think TFA meant "resolved nothing" as a literal nothing, and they meant in a more general sense of the world, not just seen from the tech point of view.

Sure, we made cool things in tech during this era, but was it worthwhile on a global scale, on a social level, in an economic sense? That is debatable.

It is nonsensical to say that the creation of the SSD or Github has created a more fair society. Apples and oranges.

huijzer5• 4 years ago

Sure, we made cool things in tech during this era, but was it worthwhile on a global scale, on a social level, in an economic sense? That is debatable.

Globally, I do think that it's getting more and more difficult each year for organizations and countries to hide immoral behavior. For example, the Chernobyl disaster of 1986 was kept secret from the West for a few days (maybe a few weeks) whereas I nowadays would imagine a Western satellite on top of it within a few hours to days. Similarly, the situation with the Uyghurs is well known and other countries do take that into account when interacting with China. With an optimistic hat on, I would say that at least knowing about immoral/inhuman actions is better than not even knowing about them. And then I come back to the SSD and chips. They help in gathering and sharing information.

boppo114• 4 years ago

Can anyone explain to me why we don't have a policy of 'natural' or 'equilibrium' interest rate? As I studied finance in college in the 2010s I was aghast to realize that the US had basically turned into a centrally planned economy, and could not wrap my head around how any serious economist could advocate for the paradigm with a straight face.

I'll never forget my freshman year investment analysis professor angrily and incoherently (to us hungover, careless freshmen) ranting about QE and going out for chain-smoking-breaks. It's so clear now.

dgellow• 4 years ago

I'll never forget my freshman year investment analysis professor angrily and incoherently (to us hungover, careless freshmen) ranting about QE and going out for chain-smoking-breaks. It's so clear now.

Could you enlighten us? What is so clear?

boppo114• 4 years ago

Asset inflation, erosion of the middle class, rise of unprofitable business getting lots of investment, etc.

hdhejenennd• 4 years ago

What would a "natural" interest rate mean to you? No open market operations, or what?

boppo114• 4 years ago

Yes, that. Not sure how the market for FF would work since that's not impacted by OMO, but I'm sure there'd be a way to just 'leave it to the market'.

hef198984• 4 years ago

What makes you think that the economy featuring the most un-chained capitalism is a centrally planned economy? I wasn't aware of any government dictated 5 year plans or similar thing anywhere in the western world.

boppo114• 4 years ago

The FOMC is a planning committee. Even if you keep your hands out of all the other parameters of industry, setting benchmark rates dictates what kinds of businesses succeed. It's like a string that all the other strings on the marionette connect to. You don't get granular control, but you're definitely exerting a huge amount of deliberate influence.

notahacker6• 4 years ago

Because there's no such thing as a 'natural equilibrium' interest rate[1]. The base interest rate is an equilibrium, which regardless of monetary policy regime is influenced by something completely artificial (the quantity of base money in an economy) and lending activity. The Fed deciding to set the quantity of base money added to an economy 'no more ever' or 'x% per year' or 'in proportion to stocks of some shiny metal' or some other target leads to every bit as much of an artificial equilibrium interest rate, it's just that the vast majority of alternatives lead to more volatility and lower growth.

[1]OK, there's Wicksell defining "natural" interest rate as one which leads to commodity price stability, but a slight modification of Wicksell's definition of price stability (to avoid the threat of destabilising deflation) has actually been the Fed's primary objective over recent decades...

boppo114• 4 years ago

I mean, if we didn't interfere with the buying/selling of treasuries, wouldn't that be equilibrium?

michaelt3• 4 years ago

One serious economic theory states there is a 'business cycle' [1], where the economy varies between doing well and doing badly every, say, 5-10 years. Keynesian economists [2] think the government should dampen these cycles by saving up a war chest when the economy is doing well, and spending when the economy is doing badly.

After all, if there's a Great Depression and you build the Hoover Dam, you get a big discount on the construction because nobody else is building - and you get 10,000 jobs for people who would otherwise be idle.

So the idea of targeting a given amount of growth, pressing the throttle on the economy when below that and the brakes when above it, is a well established notion.

Of course, these days in practice election cycles don't match business cycles, and there ain't no way Party A is building up a war-chest so Party B can deliver tax cuts, or vice-versa. And if a sector of the economy - like house prices - is overheating, the government is as likely to cut taxes to help out buyers, as it is to raise taxes to reduce price growth and build up a war chest.

[1] https://en.wikipedia.org/wiki/Business_cycle [2] https://en.wikipedia.org/wiki/Keynesian_economics

boppo114• 4 years ago

Well that makes a lot of sense for fiscal policy, but what about monetary policy? A professor explained it "lower rates make it easier for businesses to get loans, so they can create jobs!" This seems wholly and obviously short-sighted to me. Where does the theory address whether those jobs create anything worthwhile? Inflated valuation of suboptimal or unprofitable business?

These are really elementary questions/conclusions to explore:

Iirc Keynes said you could jumpstart an economy in the short term by paying people to dig ditches and fill them in[0] and watch a local economy pop up to support that 'industry'. What if doing so doesn't help the other primary activities and you just wind up with a ditch-digger economy? You're wasting resources on useless work.

[0]The actual quote is about filling jars with money, burying them in a mine, filling it with garbage and paying people to dig them out. I'm no bitcoiner but I had a chuckle about the guy who hired people to recover his hard drive from a landfill.

bigpeopleareold• 4 years ago

My worldview was prior to near-zero interest rates but the bulk of my career has been in the 2010s. Mine was: you work hard and others and yourself recognize value. Heh ... it didn't work during the last decade and it is my own naivete that led me to think that way. My view is purely anecdotal though. I know others had different experiences.

It took me a long time to learn that motivators for executives, shareholders, etc. were different than having a necessarily productive workforce. I can't help but say this is just my own experience and what I read though: cheap money seems to be really influential. I worked in a place for a long time that kept buying other companies with access to cheap credit lines and plenty of willing investors. I am not sure if that correlates to how little we were producing ourselves (that is, if there was a corporate strategy of buying companies precedes a product strategy.) However, this strategy would immediately stop when interest rates would jump.

I am too scared to speculate though and only walk away with a better sense of when red flags like this start to raise. Maybe there will be different things to look out for though when these influences are not present. However, I am thinking that maybe the return to "work hard and you'll be seen" will sort of come back again. Well, hopefully for myself it would. Seeing others recognize and value what I did is really encouraging.

myshpa2• 4 years ago

The whole system is so dysfunctional, it's no longer funny.

- fiscal policies (money printing)

- prevalence of bullshit jobs (70%+ of jobs are unnecessary/harmful)[0]

- exploitation of nature / future for profit motives of individuals

- systemic economic inequality

- subsidizing the most harmful things (oil, animal agriculture, plastics)

- agriculture based on degrading soils and spraying poisons

- health/medicine focused on perpetual treatment instead of prevention of diseases

If it doesn't work as it should, it's always the money somewhere behind the curtain.

One can't but think of the final chapters of the Hitchhiker's guide to the galaxy, where administrative workers and phone headset cleaners hoard tree leaves, in an attempt to reconstruct the economic system (note to myself: read it again).

[0] https://libcom.org/article/phenomenon-bullshit-jobs-david-gr...

jean_tta• 4 years ago

Isn't "money printing" monetary policy, as opposed to fiscal policy?

myshpa2• 4 years ago

You're right, of course.

mikewarot• 4 years ago

The ability to just buy replacements for things instead of repairing them might be coming to an end. A focus on reparability and reusability for physical goods could be making a comeback.

What if your entire worldview was just because of near-zero interest rates?

Related Stories