Was just trying to explain to someone why everything is going to shit, specifically companies, and realized, I don’t fully get it either.
I’ve got the following explanation. The sentences marked with “???” are were I’m lost. Anyone mind telling me, if they’re correct and if so, why?
The past few years, central banks were giving out interest rates of 0% or even negative percentages. Regular banks would not quite pass this on, but you could still loan money and give it back later with no real interest payments.
This lead to lots of people investing in companies. As long as those companies paid out more money than those low interest rates, it was worthwhile. But at the same time, this meant companies didn’t have to be profitable, because they could pay out investors from money that other investors gave them???
This has stopped being the case, as central banks are hiking interest rates again, to combat inflation???
So just to answer the parts that didn’t make sense to you…
Basically, interest rates were so low that investors would throw huge sums of money at companies that might one day pay off huge (called moonshots. Basically, everyone wanted a piece of the next google.)
This was fine because with low interest rates, there weren’t secure guaranteed other investments those investors could be making.
But now, investors can, fairly safely, put their money into t bills (basically, lending it to government which is traditionally exceptionally safe) and get a decent return.
So investors are ready to pull their money out unless they see some sort of return. Hence, a site like reddit is now trying desperately to monetize so as to turn a profit or to go public, sell shares and reward the initial investors.
The central banks bit… Typically, the way to fight inflation is to slow the economy down by raising interest rates. When interest rates are high, it costs more to borrow so it’s harder to get capital to start a business, grow business etc which slows the economy and, in theory, slows inflation.
Happy to clarify!
Thanks! I guess, I posed this question badly as most of the other folks came here to philosophize or rant.
If you’re doing those moonshots and a company isn’t profitable, does that mean you don’t get paid out in the meantime? You just keep your money in there, because the company’s valuation rises, which makes your x% company ownership worth more, right?
Right, and with inflation, we just need to slow it, i.e. stretch it over a longer period of time, because we have automatic processes in place to adjust for a certain rate of inflation over a fixed period of time (like for example work contracts that include an automatic pay raise every year).
Not really, that’s just how this place is.
Well, part of posing it badly was to post it to AskLemmy, because yeah, this is more just an opinion community. I probably should’ve gone to some finance-related community, but couldn’t think of one, off the top of my head…
Usually, yup. Investment deal structure varies but generally that’s the case. You can sometimes borrow money to buy out an original investor, which is what I think what part of your earlier explanation bit meant.
Basically, yeah. We kind of just accept there will be some degree of inflation… I don’t recall any arguments as to why zero inflation would be bad but I think inflation’s existenxe is just a fact of economic life. So we want to spread it out in an orderly fashion so those processes you correctly listed can quietly do their thing.