4 ms·

The end of 0% interest rates: what it means for tech startups and the industry

18 points by wjb3 3y ago

samspenc 3y ago
Is his interest rate example correct? > In 2020, the 10-year US treasury note yielded 0.5-0.7% per year. In 2023, it was between 4-5% – and 4%. These bonds pay interest every 6 months and return the principal amount invested in 10 years. Here’s how much money every $1,000 invested would yield: And then he goes on to show that $1000 invested at a 4-5% interest rate would yield either $400 or $500 after 10 years. But I thought that US treasuries, bonds and similar investments yield compound interest? Or was I mistaken all this time and it's been simple interest all along.
- p10_user 3y ago
  It doesn't compound because you aren't repurchasing more treasuries with your interest.
  - Kon-Peki 3y ago
    You are right, but... You get a coupon payment every 6 months for 10 years and you have to do something with that money. It can have a compounding effect if you aren't just spending it on beer and Cheetos. So for most people, the interest does compound - just not directly.
- pram 3y ago
  Savings bonds and CDs compound. T-bills just pay the interest.
mo_42 3y ago
In finance and investing, the value of something is computed using the net present value [1]. It's a, theoretically infinite, geometric series. Basically, all the future cash flows are accumulated today. If the interest rate is high, cash flows in the future have almost zero value today. So future is not really important. If the interest rate gets close to zero, future cash flows become relevant. As an investor, I'll focus more on currently profitable investments in a high-interest-rate scenario and more on possible future profits (a.k.a. growth) in a low interest environment. To me, this is what it means for tech startups and the industry. The rest of the article sounds very much like conventional wisdom about interest rate from any econ 101 class. What I miss a little bit in such economic discussions is that people don't base their explanations in terms of consumption of real goods. All the economic activity, after all, has the goal to provide some consumable value to people (in that sense listening to music is also consumption of a real good). I think inflation has gone up because we had suddenly higher demand and it took some time to expand supply (e.g., production of computer chips). As the current supply is not enough for all demand, some individuals need to wait. Interest is their compensation for waiting. That's why I think low, zero, or even negative interest rates will be the future as production of goods is surpassing meaningful consumption. In that sense, the current interest rates are an anomaly. [1] https://en.wikipedia.org/wiki/Net_present_value https://en.wikipedia.org/wiki/Net_present_value
486sx33 3y ago
It means that your burn rate is very important and path to profit is paramount. Just like every other new business in the history of business.
richrichie 3y ago
The author commits a common fallacy that even finance professionals fall prey to: nominal rate fallacy. Nominal rates do not matter. Real rates matter. Price of risk is not a function of nominal interest rate. It is something that is in excess of interest rate. Increase or decrease in interest rate just translates coordinates by a constant amount. Laws of motion do not change.
- nothercastle 3y ago
  Real rates are still probably near zero but they were negative before

18 points by wjb3 3y ago

Is his interest rate example correct? > In 2020, the 10-year US treasury note yielded 0.5-0.7% per year. In 2023, it was between 4-5% – and 4%. These bonds pay interest every 6 months and return the principal amount invested in 10 years. Here’s how much money every $1,000 invested would yield: And then he goes on to show that $1000 invested at a 4-5% interest rate would yield either $400 or $500 after 10 years. But I thought that US treasuries, bonds and similar investments yield compound interest? Or was I mistaken all this time and it's been simple interest all along.

p10_user 3y ago
It doesn't compound because you aren't repurchasing more treasuries with your interest.
- Kon-Peki 3y ago
  You are right, but... You get a coupon payment every 6 months for 10 years and you have to do something with that money. It can have a compounding effect if you aren't just spending it on beer and Cheetos. So for most people, the interest does compound - just not directly.
pram 3y ago
Savings bonds and CDs compound. T-bills just pay the interest.

mo_42 3y ago

In finance and investing, the value of something is computed using the net present value [1]. It's a, theoretically infinite, geometric series. Basically, all the future cash flows are accumulated today. If the interest rate is high, cash flows in the future have almost zero value today. So future is not really important. If the interest rate gets close to zero, future cash flows become relevant. As an investor, I'll focus more on currently profitable investments in a high-interest-rate scenario and more on possible future profits (a.k.a. growth) in a low interest environment. To me, this is what it means for tech startups and the industry. The rest of the article sounds very much like conventional wisdom about interest rate from any econ 101 class. What I miss a little bit in such economic discussions is that people don't base their explanations in terms of consumption of real goods. All the economic activity, after all, has the goal to provide some consumable value to people (in that sense listening to music is also consumption of a real good). I think inflation has gone up because we had suddenly higher demand and it took some time to expand supply (e.g., production of computer chips). As the current supply is not enough for all demand, some individuals need to wait. Interest is their compensation for waiting. That's why I think low, zero, or even negative interest rates will be the future as production of goods is surpassing meaningful consumption. In that sense, the current interest rates are an anomaly. [1] https://en.wikipedia.org/wiki/Net_present_value https://en.wikipedia.org/wiki/Net_present_value

486sx33 3y ago

It means that your burn rate is very important and path to profit is paramount. Just like every other new business in the history of business.

richrichie 3y ago

The author commits a common fallacy that even finance professionals fall prey to: nominal rate fallacy. Nominal rates do not matter. Real rates matter. Price of risk is not a function of nominal interest rate. It is something that is in excess of interest rate. Increase or decrease in interest rate just translates coordinates by a constant amount. Laws of motion do not change.

nothercastle 3y ago
Real rates are still probably near zero but they were negative before