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I really dislike these takes on low interest rates. As far back as the 70s (when interest rates were 8-15%), there have been random business ideas being starte

I really dislike these takes on low interest rates. As far back as the 70s (when interest rates were 8-15%), there have been random business ideas being started and shutdown (pet rocks, every airline ever, etc.). We don't remember those because they shutdown 40 years ago. Today, we only see the successful ones that survived (walmart, fedex, etc.). There's a legit question: why have long term interests declined over the past 500 years, accelerating in the past 50-100 years. The answer to that more likely has to do with some very broad phenomenon: capital has been accumulating due to increases in energy availability. Human talent (that turns capital into something actual) is plateauing due to slowing of population growth. Testable Prediction: we will have <1% fed interest rates again at some point before 2030, because the long term trend remains downward for now.

kspacewalk2 4y ago
Have those random business ideas grown to anything like billion-dollar companies (adjusted for inflation) before everyone realized that oops, actually these things won't turn a profit? It's a fair argument to make that low interest rates (with can be thought of as a proxy for 'too much money chasing too few opportunities') take random ideas and inject them with far too much money. (Airline industry is a special case, eventual "failure" is part of the business plan, so leave those aside.)
- obblekk 4y ago
  I'm not sure why airlines should be excluded. They were the "growth at all costs, we'll make it up on volume" business of the 70s and 80s. More capital invested than ever returned over 40 years. Other businesses like this: franchise restaurants (many, many failed), motels, car rentals (you can see the gold rush in supporting the new tourist economy back then).
- majormajor 4y ago
  > (Airline industry is a special case, eventual "failure" is part of the business plan, so leave those aside.) You could make this statement about today's "unicorns" too, once you start excluding things. If you're cynical, be cynical equally. WeWork? Classic "greater fool" "let it fail after we cash out" company. Many others out there too. Crypto? 10000%. I'm sure there will be a bunch of "obvious failure in retrospect" companies in a large-language-model wave too.
xyzelement 4y ago
Hang on... This sub-thread is venturing into the territory of lumping airlines with "solutions in search of a problem" and that just doesn't make any sense to me. You can argue that airlines have not returned on the capital (it may be true, I have no idea) but there's clearly demand and utility for the product, as evidenced by nearly every flight being nearly or completely full at all times.
- ElevenLathe 4y ago
  An industry basically can't ever make a profit is not a solution to anything.
  - recursive 4y ago
    So that would be a problem without a solution.
  - mym1990 4y ago
    United Airlines making 10 billion a quarter doesn't sound like its in an industry that has no profit.
    - PaulHoule 4y ago
      Profits seem to be sporadic. Some may be doing well right now because of unusual conditions but when competition returns and things get back to normal profits might disappear.
  - cedilla 4y ago
    All the goods and people transported won't mind that a few shareholders were unhappy.
    - lesuorac 4y ago
      They might be unhappy when the profitable business are all ran out of town and the unprofitable ones collapse leaving neither behind.
mym1990 4y ago
The case for decrease of human talent(however you quantify that kind of metric, if it is even true) likely has little to do with population growth, and rather the quality of education that can be provided to a broad population.
- epicureanideal 4y ago
  Or to the reduced incentives available to most of the population. The very rich are accumulating more and even the upper middle class are struggling, and it might take decades of work to build up enough capital to start a small business, while someone with the right connections and half the talent is handed money for little effort.
  - mym1990 4y ago
    Reduced incentives for what?
    - wolfram74 4y ago
      What's the point in generating value if it's all being captured by the capital holding class?
      - mym1990 4y ago
        I generate value for my company in exchange for payment so I can put food on the table and not starve, seems to be a pretty good reason for me.
      - PeterisP 4y ago
        The chance to become part of the capital holding class.
        epicureanideal 4y ago
        Right, but incentives are reduced as this becomes less and less likely for any given amount of effort.
trgn 4y ago
> has to do with some very broad phenomenon: Consider also social and political stability. The variability of interest rates in function of societal cohesion was already observed hundreds of years ago, and seems consistent across timescales and geographies.
epicureanideal 4y ago
Based on my experience working for many startups, I would say talent is not plateauing, but the capital is being managed and deployed by shockingly incompetent people. Far less competent than the people who end up working for them.
prottog 4y ago
> why have long term interests declined over the past 500 years, accelerating in the past 50-100 years The cost of money (that is, interest) is based on two things: the time value of money, which is the concept that an amount of money is worth more now than the same amount of money later (above and beyond inflation); and the default risk, that you may not get back some or all of the money that you lent out. As the world became more stable over time, the default risk also lessened over time; and there's a good argument that the time value of money also decreased over time, as the quickening of the pace of technological advances meant that lenders could expect more returns over a shorter amount of time. Both factors combined to gradually decrease interest rates in the recent past. If you believe that we are now in a new era of geopolitical instability, it's reasonable to bet on this long-term trend reversing.
- FooBarBizBazz 4y ago
  > the time value of money also decreased over time, as the quickening of the pace of technological advances meant that lenders could expect more returns over a shorter amount of time. Isn't this backwards? In a world where money has no time-value, a world where a dollar today is the same as a dollar tomorrow, and the same as a dollar five years from now, then, if there's no default risk, you can pay me back the same dollar I gave you, without interest. Zero interest rates. In a world where everything changes rapidly and I might need money now, I'm going to demand a lot of interest before I'll lend you my cash. Because I'm incurring a lot of opportunity cost by parting with it. If this were a reinforcement learning problem, we might specify a discount factor. If that discount factor were near one, then we'd have a long time horizon. If it were closer to zero, then we'd have a short time horizon. I'd think that low interest rates would go together with a static, unchanging environment, in which money has very little time-value. I do agree, however, with your earlier sentence: > As the world became more stable over time, the default risk also lessened over time
  - prottog 4y ago
    > In a world where everything changes rapidly and I might need money now, I'm going to demand a lot of interest before I'll lend you my cash. Because I'm incurring a lot of opportunity cost by parting with it. My logic is that the market participants have the expectation that everything changes rapidly for the better; that is, advances in technology have a deflationary effect and therefore people are happy to lend at a lower interest rate, expecting the same number of dollars to buy more later.
nicoburns 4y ago
I thought the reason interest rates have been so low for the last ~30 years is because governments in the 90s (certainly the US and UK ones) took the decision to make it their monetary policy to keep them low.
- imtringued 4y ago
  You mean they decided to keep inflation low which obviously also means lower interest rates in the long run.
  - nicoburns 4y ago
    Yes, this was indeed what I meant.
satvikpendem 4y ago
Pet rocks were actually quite profitable, the creator made a few million dollars if I recall correctly. Contrast that to unprofitable ventures today, like food delivery companies or Twitter.
spaceman_2020 4y ago
Counterpoint: The entire crypto market, which topped over $3 trillion in value at one point. Even as someone who believes in crypto, some of the stuff being built is beyond stupid, and could only be built at a time when no real work needs to be done. Like I understand Ethereum. I also understand basic DeFi projects building on top of Ethereum - Maker, Uniswap, AAVE, Compound, etc. But once you start going a few layer deeper, you realize the sheer excess and waste. Like a project that allows you to wrap your leveraged positions in AAVE and deposit them into a dual-token vault and earn yield if one of the two tokens goes up or if there are liquidations in your AAVE or... It's mind boggling that people thought spending their resources creating virtualization upon virtualization upon virtualization... Somehow, I can't imagine something like this happening if you were paying 10% interest on your mortgage.
opportune 4y ago
One theory for why we seem to structurally “need” low rates now is due to the “tendency of profit to fall” the natural interest rate - what it would be without the fed - has also fallen. Over the long run the Fed gravitates towards the natural rate because it creates the most stable business environment. The major structural phenomenon which prevents the tendency for profit to fall is technological innovation which creates disruption and temporary periods of higher profits due to things becoming more efficient. However, now that technological progress is quite far along, a lot of employment is in service fields which naturally cannot be made much more efficient (eg teaching, being a nurse). I don’t entirely buy into all the Marx concepts but I do think the tendency for profit to fall is an inevitability in a stable, functioning free market as efficiency and competition drive down margins. This causes ROIC to lower
imtringued 4y ago
Also people don't seem to understand that an optimal growth path had high interest rates in the beginning and low interest rates in the end. If you have a constant interest rate aka exponential growth that actually means you are growing too slowly in the beginning and too quickly in the end. Even if you subscribe to the classical time preference theory it doesn't make sense for the market to signal that you need to save more today and then signal once the future arrives that you need to save more. If the interest rate were stuck at a positive 3% this would imply that people will perpetually ignore the present and therefore some of the savings will never be spent ever. I.e. aggregate demand will be below aggregate supply. So no, zero percent interest is not some abberation, it is simply the result of low inflation rates and high rates of capital formation and the lowering of capital intensity due to software companies.
v0idzer0 4y ago
I think it’s just the modern fiscal policy adopted by the FED. They’ve learned to tame inflation and are more concerned with deflation. Not to mention the FED is controlled by politicians who are elected by the media who is owned by the wealthy who own stocks and want them going up.

kspacewalk2 4y ago

Have those random business ideas grown to anything like billion-dollar companies (adjusted for inflation) before everyone realized that oops, actually these things won't turn a profit? It's a fair argument to make that low interest rates (with can be thought of as a proxy for 'too much money chasing too few opportunities') take random ideas and inject them with far too much money. (Airline industry is a special case, eventual "failure" is part of the business plan, so leave those aside.)

obblekk 4y ago
I'm not sure why airlines should be excluded. They were the "growth at all costs, we'll make it up on volume" business of the 70s and 80s. More capital invested than ever returned over 40 years. Other businesses like this: franchise restaurants (many, many failed), motels, car rentals (you can see the gold rush in supporting the new tourist economy back then).
majormajor 4y ago
> (Airline industry is a special case, eventual "failure" is part of the business plan, so leave those aside.) You could make this statement about today's "unicorns" too, once you start excluding things. If you're cynical, be cynical equally. WeWork? Classic "greater fool" "let it fail after we cash out" company. Many others out there too. Crypto? 10000%. I'm sure there will be a bunch of "obvious failure in retrospect" companies in a large-language-model wave too.

xyzelement 4y ago

Hang on... This sub-thread is venturing into the territory of lumping airlines with "solutions in search of a problem" and that just doesn't make any sense to me. You can argue that airlines have not returned on the capital (it may be true, I have no idea) but there's clearly demand and utility for the product, as evidenced by nearly every flight being nearly or completely full at all times.

ElevenLathe 4y ago
An industry basically can't ever make a profit is not a solution to anything.
- recursive 4y ago
  So that would be a problem without a solution.
- mym1990 4y ago
  United Airlines making 10 billion a quarter doesn't sound like its in an industry that has no profit.
  - PaulHoule 4y ago
    Profits seem to be sporadic. Some may be doing well right now because of unusual conditions but when competition returns and things get back to normal profits might disappear.
- cedilla 4y ago
  All the goods and people transported won't mind that a few shareholders were unhappy.
  - lesuorac 4y ago
    They might be unhappy when the profitable business are all ran out of town and the unprofitable ones collapse leaving neither behind.

mym1990 4y ago

The case for decrease of human talent(however you quantify that kind of metric, if it is even true) likely has little to do with population growth, and rather the quality of education that can be provided to a broad population.

epicureanideal 4y ago
Or to the reduced incentives available to most of the population. The very rich are accumulating more and even the upper middle class are struggling, and it might take decades of work to build up enough capital to start a small business, while someone with the right connections and half the talent is handed money for little effort.
- mym1990 4y ago
  Reduced incentives for what?
  - wolfram74 4y ago
    What's the point in generating value if it's all being captured by the capital holding class?
    - mym1990 4y ago
      I generate value for my company in exchange for payment so I can put food on the table and not starve, seems to be a pretty good reason for me.
    - PeterisP 4y ago
      The chance to become part of the capital holding class.
      - epicureanideal 4y ago
        Right, but incentives are reduced as this becomes less and less likely for any given amount of effort.

trgn 4y ago

> has to do with some very broad phenomenon: Consider also social and political stability. The variability of interest rates in function of societal cohesion was already observed hundreds of years ago, and seems consistent across timescales and geographies.

epicureanideal 4y ago

Based on my experience working for many startups, I would say talent is not plateauing, but the capital is being managed and deployed by shockingly incompetent people. Far less competent than the people who end up working for them.

prottog 4y ago

> why have long term interests declined over the past 500 years, accelerating in the past 50-100 years The cost of money (that is, interest) is based on two things: the time value of money, which is the concept that an amount of money is worth more now than the same amount of money later (above and beyond inflation); and the default risk, that you may not get back some or all of the money that you lent out. As the world became more stable over time, the default risk also lessened over time; and there's a good argument that the time value of money also decreased over time, as the quickening of the pace of technological advances meant that lenders could expect more returns over a shorter amount of time. Both factors combined to gradually decrease interest rates in the recent past. If you believe that we are now in a new era of geopolitical instability, it's reasonable to bet on this long-term trend reversing.

FooBarBizBazz 4y ago
> the time value of money also decreased over time, as the quickening of the pace of technological advances meant that lenders could expect more returns over a shorter amount of time. Isn't this backwards? In a world where money has no time-value, a world where a dollar today is the same as a dollar tomorrow, and the same as a dollar five years from now, then, if there's no default risk, you can pay me back the same dollar I gave you, without interest. Zero interest rates. In a world where everything changes rapidly and I might need money now, I'm going to demand a lot of interest before I'll lend you my cash. Because I'm incurring a lot of opportunity cost by parting with it. If this were a reinforcement learning problem, we might specify a discount factor. If that discount factor were near one, then we'd have a long time horizon. If it were closer to zero, then we'd have a short time horizon. I'd think that low interest rates would go together with a static, unchanging environment, in which money has very little time-value. I do agree, however, with your earlier sentence: > As the world became more stable over time, the default risk also lessened over time
- prottog 4y ago
  > In a world where everything changes rapidly and I might need money now, I'm going to demand a lot of interest before I'll lend you my cash. Because I'm incurring a lot of opportunity cost by parting with it. My logic is that the market participants have the expectation that everything changes rapidly for the better; that is, advances in technology have a deflationary effect and therefore people are happy to lend at a lower interest rate, expecting the same number of dollars to buy more later.

nicoburns 4y ago

I thought the reason interest rates have been so low for the last ~30 years is because governments in the 90s (certainly the US and UK ones) took the decision to make it their monetary policy to keep them low.

imtringued 4y ago
You mean they decided to keep inflation low which obviously also means lower interest rates in the long run.
- nicoburns 4y ago
  Yes, this was indeed what I meant.

satvikpendem 4y ago

Pet rocks were actually quite profitable, the creator made a few million dollars if I recall correctly. Contrast that to unprofitable ventures today, like food delivery companies or Twitter.

spaceman_2020 4y ago

Counterpoint: The entire crypto market, which topped over $3 trillion in value at one point. Even as someone who believes in crypto, some of the stuff being built is beyond stupid, and could only be built at a time when no real work needs to be done. Like I understand Ethereum. I also understand basic DeFi projects building on top of Ethereum - Maker, Uniswap, AAVE, Compound, etc. But once you start going a few layer deeper, you realize the sheer excess and waste. Like a project that allows you to wrap your leveraged positions in AAVE and deposit them into a dual-token vault and earn yield if one of the two tokens goes up or if there are liquidations in your AAVE or... It's mind boggling that people thought spending their resources creating virtualization upon virtualization upon virtualization... Somehow, I can't imagine something like this happening if you were paying 10% interest on your mortgage.

opportune 4y ago

One theory for why we seem to structurally “need” low rates now is due to the “tendency of profit to fall” the natural interest rate - what it would be without the fed - has also fallen. Over the long run the Fed gravitates towards the natural rate because it creates the most stable business environment. The major structural phenomenon which prevents the tendency for profit to fall is technological innovation which creates disruption and temporary periods of higher profits due to things becoming more efficient. However, now that technological progress is quite far along, a lot of employment is in service fields which naturally cannot be made much more efficient (eg teaching, being a nurse). I don’t entirely buy into all the Marx concepts but I do think the tendency for profit to fall is an inevitability in a stable, functioning free market as efficiency and competition drive down margins. This causes ROIC to lower

imtringued 4y ago

Also people don't seem to understand that an optimal growth path had high interest rates in the beginning and low interest rates in the end. If you have a constant interest rate aka exponential growth that actually means you are growing too slowly in the beginning and too quickly in the end. Even if you subscribe to the classical time preference theory it doesn't make sense for the market to signal that you need to save more today and then signal once the future arrives that you need to save more. If the interest rate were stuck at a positive 3% this would imply that people will perpetually ignore the present and therefore some of the savings will never be spent ever. I.e. aggregate demand will be below aggregate supply. So no, zero percent interest is not some abberation, it is simply the result of low inflation rates and high rates of capital formation and the lowering of capital intensity due to software companies.

v0idzer0 4y ago

I think it’s just the modern fiscal policy adopted by the FED. They’ve learned to tame inflation and are more concerned with deflation. Not to mention the FED is controlled by politicians who are elected by the media who is owned by the wealthy who own stocks and want them going up.