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This article is filled with large claims that run completely counter to all economic intuition and evidence we've gathered over the last century like "low inter

This article is filled with large claims that run completely counter to all economic intuition and evidence we've gathered over the last century like "low interest rates hurt businesses and cause slower growth", "large companies buying startups for lots of money hurts start up creation". Extraordinary claims require extraordinary evidence but the article provides none, and the study's the article links to are behind a paywall.

Alex3917 8y ago
If business A can't borrow money at any price, and business B can effectively borrow unlimited amounts of money for free, then how is it counter to all economic intuition than business B would have an advantage over business A?
- garmaine 8y ago
  Generally speaking startups don't borrow money to finance themselves.
  - thinkingkong 8y ago
    Thats completely untrue. They just dont borrow money from a traditional bank. Lots of growth is actually fueled by debt.
    - navigatesol 8y ago
      >They just dont borrow money from a traditional bank. I'd go a step further and say the vast majority of startups borrow money from traditional banks, through home equity, business loans or credit cards. The startup world is far larger than the stuff we read about on Demo Day.
  - Alex3917 8y ago
    Because they can't. Most people would be far less inclined to sell equity in their company if they could get a loan on fair terms that wasn't secured by their personal assets. If you watch the videos on Sweetbridge, reducing the WACC for startups and small businesses is one of the main promises of DLT.
    - navigatesol 8y ago
      >if they could get a loan on fair terms that wasn't secured by their personal assets. What constitutes a "fair rate", though? Despite popular opinion, banks are pretty damn good at assessing risk. The fact of the matter is, most small business fails. The rates reflect that. Sweetbridge looks interesting, but the risk falls somewhere, even if more diffuse.
      - Alex3917 8y ago
        > The fact of the matter is, most small business fails. The rates reflect that. OK but if you look at only the small businesses that are going to go on to succeed and be around for the next couple hundred years, they still can't borrow at the same rates as Apple or whatever.
        AnimalMuppet 8y ago
        Because nobody knows which ones they are. If the banks knew which small businesses would be around for a couple hundred years, those small businesses could probably borrow rather cheaply today.
        Alex3917 8y ago
        > Because nobody knows which ones they are. This is obviously correct. But it contradicts the idea that banks are good at assessing risk, if the closest that banks can come is lumping 100% of startups into a 'startup' bucket. If banks really were good at assessing risk then the fact that the large tech companies have access to cheap capital wouldn't necessarily hurt startups, but that isn't actually the case.
        AnimalMuppet 8y ago
        Banks can be good at assessing risk in general, and still be bad at assessing risk of startups. Nobody is good at assessing risk of startups.
    - 8y ago
  - jldugger 8y ago
    Depends on how you view borrowing. They don't get access to fixed rates, and have to sell off promises of future revenue in exchange for money up front instead. It's all financing in the end, whether you get it from bond issuance or equity issuance.
- JamesBarney 8y ago
  Of course all things being equal a company that can borrow effectively unlimited amounts of money for free has an advantage or one that can't borrow. But specifically how does that relate to start-ups and hurting growth?
paulpauper 8y ago
The shape of the curve matters. In high interest rate environments, large companies borrow at a higher rate rate relative to smaller companies because the curve is flatter. In a low-interest rate environment, the curve is very steep, so large companies borrow cheap but small companies only borrow just slightly lower rate than they do in a high interest rate environments. Large companies are able to borrow at rates closer to the fed funds rate whereas small business borrows at am much higher rate. Low interest rates and cheap borrowing allows large businesses to expand and possibly crowd out smaller businesses, that have to borrow at much more unfavorable rates.
- JamesBarney 8y ago
  Why does the steepness of the yield curve influence the interest rates small versus large companies get? Are you saying that if a big company can borrow at 'fed rate' + 2% and a small company can only borrow at 'fed rate' + 6% that as the fed rate gets smaller the relative differences in the borrowing rates increases so 8% vs 12% isn't as big of an advantage as 3% vs 7%?
  - Fjolsvith 8y ago
    From the viewpoint of the small business owner, I still have to come up with the 4% difference out of my profit margin. If I'm competing with a big corporation, that is a significant disadvantage.
    - navigatesol 8y ago
      It comes out of their profit margin too, though. And I'll bet the margins of good, small businesses are as good or better than large businesses. Of course, large businesses can generally borrow at lower rates, but that's the way "risk" works.
- j15t 8y ago
  Are you talking about the yield curve or credit spreads? Either way, as far as I understand they are independent variables to the absolute value of federal fund rate -- what matters more is the stage in the business cycle.
cimmanom 8y ago
Maybe it makes it easier to start a startup and get funded, but more difficult to succeed in competition with the big guys?

Alex3917 8y ago

If business A can't borrow money at any price, and business B can effectively borrow unlimited amounts of money for free, then how is it counter to all economic intuition than business B would have an advantage over business A?

garmaine 8y ago
Generally speaking startups don't borrow money to finance themselves.
- thinkingkong 8y ago
  Thats completely untrue. They just dont borrow money from a traditional bank. Lots of growth is actually fueled by debt.
  - navigatesol 8y ago
    >They just dont borrow money from a traditional bank. I'd go a step further and say the vast majority of startups borrow money from traditional banks, through home equity, business loans or credit cards. The startup world is far larger than the stuff we read about on Demo Day.
- Alex3917 8y ago
  Because they can't. Most people would be far less inclined to sell equity in their company if they could get a loan on fair terms that wasn't secured by their personal assets. If you watch the videos on Sweetbridge, reducing the WACC for startups and small businesses is one of the main promises of DLT.
  - navigatesol 8y ago
    >if they could get a loan on fair terms that wasn't secured by their personal assets. What constitutes a "fair rate", though? Despite popular opinion, banks are pretty damn good at assessing risk. The fact of the matter is, most small business fails. The rates reflect that. Sweetbridge looks interesting, but the risk falls somewhere, even if more diffuse.
    - Alex3917 8y ago
      > The fact of the matter is, most small business fails. The rates reflect that. OK but if you look at only the small businesses that are going to go on to succeed and be around for the next couple hundred years, they still can't borrow at the same rates as Apple or whatever.
      - AnimalMuppet 8y ago
        Because nobody knows which ones they are. If the banks knew which small businesses would be around for a couple hundred years, those small businesses could probably borrow rather cheaply today.
        Alex3917 8y ago
        > Because nobody knows which ones they are. This is obviously correct. But it contradicts the idea that banks are good at assessing risk, if the closest that banks can come is lumping 100% of startups into a 'startup' bucket. If banks really were good at assessing risk then the fact that the large tech companies have access to cheap capital wouldn't necessarily hurt startups, but that isn't actually the case.
        AnimalMuppet 8y ago
        Banks can be good at assessing risk in general, and still be bad at assessing risk of startups. Nobody is good at assessing risk of startups.
  - 8y ago
- jldugger 8y ago
  Depends on how you view borrowing. They don't get access to fixed rates, and have to sell off promises of future revenue in exchange for money up front instead. It's all financing in the end, whether you get it from bond issuance or equity issuance.
JamesBarney 8y ago
Of course all things being equal a company that can borrow effectively unlimited amounts of money for free has an advantage or one that can't borrow. But specifically how does that relate to start-ups and hurting growth?

paulpauper 8y ago

The shape of the curve matters. In high interest rate environments, large companies borrow at a higher rate rate relative to smaller companies because the curve is flatter. In a low-interest rate environment, the curve is very steep, so large companies borrow cheap but small companies only borrow just slightly lower rate than they do in a high interest rate environments. Large companies are able to borrow at rates closer to the fed funds rate whereas small business borrows at am much higher rate. Low interest rates and cheap borrowing allows large businesses to expand and possibly crowd out smaller businesses, that have to borrow at much more unfavorable rates.

JamesBarney 8y ago
Why does the steepness of the yield curve influence the interest rates small versus large companies get? Are you saying that if a big company can borrow at 'fed rate' + 2% and a small company can only borrow at 'fed rate' + 6% that as the fed rate gets smaller the relative differences in the borrowing rates increases so 8% vs 12% isn't as big of an advantage as 3% vs 7%?
- Fjolsvith 8y ago
  From the viewpoint of the small business owner, I still have to come up with the 4% difference out of my profit margin. If I'm competing with a big corporation, that is a significant disadvantage.
  - navigatesol 8y ago
    It comes out of their profit margin too, though. And I'll bet the margins of good, small businesses are as good or better than large businesses. Of course, large businesses can generally borrow at lower rates, but that's the way "risk" works.
j15t 8y ago
Are you talking about the yield curve or credit spreads? Either way, as far as I understand they are independent variables to the absolute value of federal fund rate -- what matters more is the stage in the business cycle.

cimmanom 8y ago

Maybe it makes it easier to start a startup and get funded, but more difficult to succeed in competition with the big guys?