8 ms·

> In the world of high interest rates It's worth pointing out that, historically speaking [0], we're not an in era of particularly high interest rates yet, jus

> In the world of high interest rates It's worth pointing out that, historically speaking [0], we're not an in era of particularly high interest rates yet, just not absurdly low ones. https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS

this_user 3y ago
Over the longer term that is true, but the world had gotten used to well over a decade of ZIRP or near-ZIRP after the GFC. It's an assumption that is now deeply ingrained in a lot of business models.
- couchand 3y ago
  If your business model isn't resilient to historically common events you might want to give it a bit more attention.
  - dreadlordbone 3y ago
    [flagged]
- skeeter2020 3y ago
  deeply ingrained < historical data
nine_zeros 3y ago
> It's worth pointing out that, historically speaking [0], we're not an in era of particularly high interest rates yet, just not absurdly low ones. The question is what is the right level of interest rate in 2023 as compared to say 1960. 19060s were boom time with GI bills, lots of new industries started by veterans, a booming suburban household, booming number of children. People and companies of the time had very low debt aka there was room for them to take on more debt. All of this leads to rising credit, which requires a higher interest rates to keep inflation low. 2023 is an anomalous post-pandemic boom coming from trillions added to US government debt. There is no population boom, no business boom, no new tech boom (excluding the AI stuff going on now). Nobody can take on more debt as most people/companies are completely tapped out. This actually requires lower interest rates but we have high inflation so the FED is keeping interest rates artificially high. This is to say, that companies like SNAP just cannot continue to exist in a higher interest rate environment. Neither can companies like Meta, Uber, Google, Microsoft without cutting costs somewhere or without letting the stock collapse. A recession is the only way out because companies will NEVER let the stock collapse in favor of saving their employees.
- robertlagrant 3y ago
  > A recession is the only way out because companies will NEVER let the stock collapse in favor of saving their employees. Only as stock in this case is a useful proxy for the finances of the business. It would be better to say that, outside of ridiculously comfortable and easy financial environments, companies will prioritise investing in activities that make money (directly, such as making products, or indirectly, such as security) over activities that don't.
  - nine_zeros 3y ago
    > It would be better to say that, outside of ridiculously comfortable and easy financial environemnts, companies will prioritise investing in activities that make money (directly, such as making products, or indirectly, such as security) over activities that don't. And these activities are designed to increase the stock price. Everything they do is for the price of stocks. That's how the system is.
    - robertlagrant 3y ago
      That seems a jaundiced viewpoint though. Stock prices are a proxy for the business's value going up, which businesses should in general strive for, unless they have it so monopolistic that they don't need to compete with anyone else. This is just as true in a business without stocks even being available.
      - nine_zeros 3y ago
        I'm not claiming that companies shouldn't strive to raise value of business. All I said was their activities are designed to boost stock prices, given the prevailing economic conditions. Stock prices may be related to business value or financial engineering or whatever. Doesn't matter how they get there. Their goal is to just keep stock prices rising. With this in mind, if it ever comes to choosing between employees, customers, product, or anything versus the stock price, they will choose the stock price.
pgeorgi 3y ago
The ECB aims for "2% inflation on average". Inflation and interest rate have a close relationship, so at least for them that's the new normal. I seem to remember that the Fed and other central banks likely talked about the 2% inflation target. Since 2008, the interest rate was much lower and nobody _quite_ cared, now both inflation and interest rate are higher and the ECB widened the window they consider for their average substantially to straighten things out even though they're way about 2% now. Still, there has been a shift in the finance world, and the target seems to be 2%. Having interest rates and/or inflation at twice that (or more!) seems to justify the label "high" to me.
- downWidOutaFite 3y ago
  Are you saying that central bank interest rate is targeted to be 2%? If so, I don't believe that is true. The target is 2% inflation and full employment, the interest rate is adjusted to whatever level achieves those goals.
  - deleted 3y ago
    [deleted]
  - pgeorgi 3y ago
    It's about inflation (see https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index...), but there's a relationship because their interest rate informs the interest rates across the region they maintain monetarily (practically the baseline, where every other lender adds their margin on top), and the interest rate is the strongest tool they have at their disposal to adjust inflation rate. So the central bank interest rate isn't targeted to be 2%, but it will be somewhere close to it: too high, and they drive inflation well above 2% all on their own. They can stay lower for quite a while (see the past ~15 years) but that was already considered an emergency situation. Before 2008, the ECB moved between 1.5% and 3.75% (https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke...) with at most 16 months at a time above 3% which was followed by a bump down to 1%. We'll have to see where things go from now, but the recent shift of their language towards "2% in the _medium_ term" indicates to me that we'll stay in the higher end of the spectrum for a while instead of quickly trending down again.
xwdv 3y ago
As long as we’re pointing things out, we should also point out that unsustainable companies have not quite yet collapsed due to interest rates. We’re only seeing some pain, but once we due reach a proper high interest rate era these companies will be gone.
- tempsy 3y ago
  Birds scooter (remember them?) was just kicked off NYSE and trading on OTC. It's literally down -99.7% since they IPO'd. This was valued at nearly $10B at the peak.
  - jamiek88 3y ago
    SPAC’s don’t count. They were all scams to start with.
    - tempsy 3y ago
      of course this counts. scooters were viewed at the next Uber in 2017-2018 with massive amounts of funding from well known VCs. and yes I realize the majority of SPACs were pre-product scams.
      - xwdv 3y ago
        It doesn’t. But if it did, I would still say the collapse wasn’t due to interest rate hikes but rather from increasing regulation banning these scooters from major cities and from a flood of cheap competitors.
        tempsy 3y ago
        "it doesn't because i said so!"
        nradov 3y ago
        I still see people riding rental electric scooters all over most major cities. Seems like a viable business, although mostly commoditized now.
brutus1213 3y ago
This is a slick visualization and agree with your point. I feel ZIRP for such an extended time period was nuts and it was responsible for the asset bubble, let weak players survive and supported more risk taking. As I was looking at the chart, I noticed there was a big bump from 1994 to 1995 (like from 3% to 6%). What happened then? Was it inflation? I recall rates were about 6ish since when I was in undergrad. I guess Greenspan/Y2K/dot com days. Edited: found the answer and it is intriguing: https://markets.businessinsider.com/news/bonds/federal-reserve-interest-rate-hikes-1994-playbook-bond-market-massacre-2022-6#:~:text=Greenspan's%20Fed%20raised%20rates%20seven,economy%20from%20driving%20up%20inflation https://markets.businessinsider.com/news/bonds/federal-reser.... The stock market craziness continued even with high rates .. wow .. didn't expect that.
- Apocryphon 3y ago
  Makes me wonder how the last decade and half of tech would have looked like had not ZIRP been around to prop up the industry.
  - brutus1213 3y ago
    When I finished undergrad, the most desirable tech company to work for was Microsoft. They paid 55-60K (starting comp) I recall? Interviews were nothing like today (with the insanity of leetcode). What is mind boggling is that I'd have a better quality of life in those days (houses were super cheap) and work was not as competitive/backstabby as today. The million dollar compensations (when counting stock growth) and intensity/stress around interviews and promotions is what ZIRP wrought for the elite in tech. Would be interested if people who were mid-career in the mid 90s can comment on their perspective.
    - tetrep 3y ago
      > Interviews were nothing like today (with the insanity of leetcode). Would that mean it was the era of "Why are manhole covers round?" I don't want to sound like someone who supports leetcode (mostly because I don't), but it seems like it's at least an attempt at measuring something related to programming skills.
vishnugupta 3y ago
Also if you look at the graph you see that we were on track to reach around the current rate anyway but for COVID. So the current hike shouldn’t have been surprising at all.
hammock 3y ago
Well, we are at 20-year highs... and a typical business career is only 40 years long. So I believe "high interest rates" is fair.

this_user 3y ago

Over the longer term that is true, but the world had gotten used to well over a decade of ZIRP or near-ZIRP after the GFC. It's an assumption that is now deeply ingrained in a lot of business models.

couchand 3y ago
If your business model isn't resilient to historically common events you might want to give it a bit more attention.
- dreadlordbone 3y ago
  [flagged]
skeeter2020 3y ago
deeply ingrained < historical data

nine_zeros 3y ago

> It's worth pointing out that, historically speaking [0], we're not an in era of particularly high interest rates yet, just not absurdly low ones. The question is what is the right level of interest rate in 2023 as compared to say 1960. 19060s were boom time with GI bills, lots of new industries started by veterans, a booming suburban household, booming number of children. People and companies of the time had very low debt aka there was room for them to take on more debt. All of this leads to rising credit, which requires a higher interest rates to keep inflation low. 2023 is an anomalous post-pandemic boom coming from trillions added to US government debt. There is no population boom, no business boom, no new tech boom (excluding the AI stuff going on now). Nobody can take on more debt as most people/companies are completely tapped out. This actually requires lower interest rates but we have high inflation so the FED is keeping interest rates artificially high. This is to say, that companies like SNAP just cannot continue to exist in a higher interest rate environment. Neither can companies like Meta, Uber, Google, Microsoft without cutting costs somewhere or without letting the stock collapse. A recession is the only way out because companies will NEVER let the stock collapse in favor of saving their employees.

robertlagrant 3y ago
> A recession is the only way out because companies will NEVER let the stock collapse in favor of saving their employees. Only as stock in this case is a useful proxy for the finances of the business. It would be better to say that, outside of ridiculously comfortable and easy financial environments, companies will prioritise investing in activities that make money (directly, such as making products, or indirectly, such as security) over activities that don't.
- nine_zeros 3y ago
  > It would be better to say that, outside of ridiculously comfortable and easy financial environemnts, companies will prioritise investing in activities that make money (directly, such as making products, or indirectly, such as security) over activities that don't. And these activities are designed to increase the stock price. Everything they do is for the price of stocks. That's how the system is.
  - robertlagrant 3y ago
    That seems a jaundiced viewpoint though. Stock prices are a proxy for the business's value going up, which businesses should in general strive for, unless they have it so monopolistic that they don't need to compete with anyone else. This is just as true in a business without stocks even being available.
    - nine_zeros 3y ago
      I'm not claiming that companies shouldn't strive to raise value of business. All I said was their activities are designed to boost stock prices, given the prevailing economic conditions. Stock prices may be related to business value or financial engineering or whatever. Doesn't matter how they get there. Their goal is to just keep stock prices rising. With this in mind, if it ever comes to choosing between employees, customers, product, or anything versus the stock price, they will choose the stock price.

pgeorgi 3y ago

The ECB aims for "2% inflation on average". Inflation and interest rate have a close relationship, so at least for them that's the new normal. I seem to remember that the Fed and other central banks likely talked about the 2% inflation target. Since 2008, the interest rate was much lower and nobody _quite_ cared, now both inflation and interest rate are higher and the ECB widened the window they consider for their average substantially to straighten things out even though they're way about 2% now. Still, there has been a shift in the finance world, and the target seems to be 2%. Having interest rates and/or inflation at twice that (or more!) seems to justify the label "high" to me.

downWidOutaFite 3y ago
Are you saying that central bank interest rate is targeted to be 2%? If so, I don't believe that is true. The target is 2% inflation and full employment, the interest rate is adjusted to whatever level achieves those goals.
- deleted 3y ago
  [deleted]
- pgeorgi 3y ago
  It's about inflation (see https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index...), but there's a relationship because their interest rate informs the interest rates across the region they maintain monetarily (practically the baseline, where every other lender adds their margin on top), and the interest rate is the strongest tool they have at their disposal to adjust inflation rate. So the central bank interest rate isn't targeted to be 2%, but it will be somewhere close to it: too high, and they drive inflation well above 2% all on their own. They can stay lower for quite a while (see the past ~15 years) but that was already considered an emergency situation. Before 2008, the ECB moved between 1.5% and 3.75% (https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke...) with at most 16 months at a time above 3% which was followed by a bump down to 1%. We'll have to see where things go from now, but the recent shift of their language towards "2% in the _medium_ term" indicates to me that we'll stay in the higher end of the spectrum for a while instead of quickly trending down again.

xwdv 3y ago

As long as we’re pointing things out, we should also point out that unsustainable companies have not quite yet collapsed due to interest rates. We’re only seeing some pain, but once we due reach a proper high interest rate era these companies will be gone.

tempsy 3y ago
Birds scooter (remember them?) was just kicked off NYSE and trading on OTC. It's literally down -99.7% since they IPO'd. This was valued at nearly $10B at the peak.
- jamiek88 3y ago
  SPAC’s don’t count. They were all scams to start with.
  - tempsy 3y ago
    of course this counts. scooters were viewed at the next Uber in 2017-2018 with massive amounts of funding from well known VCs. and yes I realize the majority of SPACs were pre-product scams.
    - xwdv 3y ago
      It doesn’t. But if it did, I would still say the collapse wasn’t due to interest rate hikes but rather from increasing regulation banning these scooters from major cities and from a flood of cheap competitors.
      - tempsy 3y ago
        "it doesn't because i said so!"
      - nradov 3y ago
        I still see people riding rental electric scooters all over most major cities. Seems like a viable business, although mostly commoditized now.

brutus1213 3y ago

This is a slick visualization and agree with your point. I feel ZIRP for such an extended time period was nuts and it was responsible for the asset bubble, let weak players survive and supported more risk taking. As I was looking at the chart, I noticed there was a big bump from 1994 to 1995 (like from 3% to 6%). What happened then? Was it inflation? I recall rates were about 6ish since when I was in undergrad. I guess Greenspan/Y2K/dot com days. Edited: found the answer and it is intriguing: https://markets.businessinsider.com/news/bonds/federal-reserve-interest-rate-hikes-1994-playbook-bond-market-massacre-2022-6#:~:text=Greenspan's%20Fed%20raised%20rates%20seven,economy%20from%20driving%20up%20inflation https://markets.businessinsider.com/news/bonds/federal-reser.... The stock market craziness continued even with high rates .. wow .. didn't expect that.

Apocryphon 3y ago
Makes me wonder how the last decade and half of tech would have looked like had not ZIRP been around to prop up the industry.
- brutus1213 3y ago
  When I finished undergrad, the most desirable tech company to work for was Microsoft. They paid 55-60K (starting comp) I recall? Interviews were nothing like today (with the insanity of leetcode). What is mind boggling is that I'd have a better quality of life in those days (houses were super cheap) and work was not as competitive/backstabby as today. The million dollar compensations (when counting stock growth) and intensity/stress around interviews and promotions is what ZIRP wrought for the elite in tech. Would be interested if people who were mid-career in the mid 90s can comment on their perspective.
  - tetrep 3y ago
    > Interviews were nothing like today (with the insanity of leetcode). Would that mean it was the era of "Why are manhole covers round?" I don't want to sound like someone who supports leetcode (mostly because I don't), but it seems like it's at least an attempt at measuring something related to programming skills.

vishnugupta 3y ago

Also if you look at the graph you see that we were on track to reach around the current rate anyway but for COVID. So the current hike shouldn’t have been surprising at all.

hammock 3y ago

Well, we are at 20-year highs... and a typical business career is only 40 years long. So I believe "high interest rates" is fair.