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My projection is that this is resulting from a lot of circular investing. Fund A gives money to company B, who has more money than they can spend so it goes to
by tfha 9y ago
My projection is that this is resulting from a lot of circular investing. Fund A gives money to company B, who has more money than they can spend so it goes to fund C, and then that goes to company D, etc.
We've learned that you are not supposed to have idle capital. And yet we keep so much of our wealth as money, the only way to deploy it is to send it in a circle. Valuations go up, prices and costs don't.
Unfortunately it's a house of cards. When someone finally cashes out, they'll pull money from the whole system to the tune of the amount it's been amplified by circular investing.
There will be an ugly correction.
- pishpash 9y agoThat end is called raising the interest rate. When the rate hits some magic phase transition number where enough people believe you can invest in safe liquid accounts for more than the return on risky assets then the whole thing collapses. But then it'll get propped up again afterwards and everybody believes that now.
- eighthnate 9y agoNot sure why you are being downvoted. That's essentially how things work. That's what FED and interest rates exist to do. Create and pop bubbles. As the FED raises interest rates, money will start trickling out of "riskier" assets. The quicker the FED raises interest rates, the more quickly money will leave. Then we get a recession and when the FED feels they've sopped up enough money from the economy, then they will lower interest rates to get more money into the system, get more economic activity and re-inflate asset prices.
- hodder 9y agoIt is a spectrum not an absolute magic rate. As rates rise, different individual investments will be foregone.