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.
> 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.
I think it might also end up being important to remain competitive in a global market where the other economic superpower's government is willing to invest trillions into building whatever it wants and needs despite profitability[1].
Some things we want/need won't be immediately profitable, or even profitable in the long run. They might not even be things we realize we need until something unprofitable is researched and developed.
Not saying that Snap is something we need, but if the US is forced to strictly rely on market forces to compete, "free" capital via low/no interest rates is a way to kind of do it.
How much of ZIRP-inflated capital went into chasing fanciful ventures like UberEats, Wework, Doordash, Airbnb, crypto and Twitter? State-run capitalism channeling funds into strategically important areas feels like a breath of fresh air compared to handing it to venture capitalists.
There is a nice Youtube channel called asionometry that shows that this was done time and time again (maybe more in Asia and Europe) in things related to electronics and semicon manufacturer, and it failed most of the time. TSMC was a shocking exception though I'm sure there are others.
In the old days, these investments were tiny compared to what is being currently spent on the chips act. I think for STEM a better approach would be a govt sponsored entrepreneurship thing .. imagine the same YC deal but we give this to any PhDs (or maybe even Masters) once in their career. I'm from Canada and when I see the cash wasted on other initiatives, I can't help but wonder why this is done. Not to say Masters or PhDs are geniuses. It is just the current system means only the well-to-do or well-pedigreed can get into places like YC (and maybe elite schools like Berkeley) while intelligence, grit and ambition are more widely distributed.
I agree, hence my comment about the US choosing to rely strictly on markets to allocate capital. If the only lever the country is willing to pull is to adjust interest rates, it's sort of a means to that end, however inefficient.
But how many businesses that might have been profitable just fine and that will be wanted/needed at one point have disappeared or just never happened because their market was killed by one of those post-profitability unicorns high on ZIRP-fueled market cap? Up to what point is it still market capitalism and where does it become barely more than an elaborate hoax benefiting those who lack neither collateral nor the will to leverage?
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.
> 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.
Eh...interviews were a mix of brainteasers like the manhole question and coding questions. IIRC some of my MSFT interviews back when allowed pseudocode but mostly wanted to fill the role of e.g. FizzBuzz. Then IIRC there was some validation of C or C++ competency.
Leetcode is FizzBuzz on steroids, but IMHO is not on its own likely to be more predictive of success at a company than the old MSFT way.
Being able to reason about possible design decisions and constraints of things you encounter sounds much more related to programming jobs than being able to code a red-black tree from the top of your head.
Looking back, the highest quality of life I ever enjoyed was when I was working my first software development job out of university in the 90s. $45K/year comp and I bought a condo for $45K. Imagine: being able to buy an actual house for a mere 1X your yearly salary. Unheard of now. It's been all downhill from there in terms of the cost-of-living:compensation ratio. And that's for software development, one of the more financially lucrative careers out there. It's been even steeper downhill for non-techies.
Was there 96-2000 and agree completely. It was a paradisical time and I knew it, because this was nowhere near my first job. Best work situation I ever had. People were great, and bureaucracy was big enough to be useful but small enough to be intrusive.
> 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.
> 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.
> 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.
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.
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.
I don't think there's any point saying this in this way, though. Not every company will do anything it takes to hit a stock market goal, even financial engineering. Many will just work on fundamentals, and either go broke or get outcompeted or succeed.
And there are plenty of companies that aren't public companies with any stock to buy.
It just seems far too simplistic. You seem to be critiquing the times that some company use slightly dodgy financial engineering to boost their stock price. But that's not many companies, and not all the time - it's never a permanent fix. There's certainly no need to attach stock price reason to these layoffs, which are much more likely just cost-cutting measures designed to save the company a load of money it thinks is more valuable than the work of those people.
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.
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.
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.
It's about inflation (see 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.
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.
> 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.
Isn't it the reverse relationship? Increased rate decrease the velocity of money and decrease inflation?
(At the risk of causing a recession)
Central banks have been raising interests to fight inflation so far.
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.
Why wouldn't SPACs count? What allowed those financial scams, spacs, crypto, zombie companies, was this low interest rates environment, for over a decade. Of course SPACs count, they are a consequence of LIR.
I think SPACs are a bit different. They have been around since the 1990s, and for a long time there were maybe a dozen SPACs in a year. In 2021 there were about 600.
I think they will stick around and go back to their previous volume. Grift-o-currency is a scam and I hope it dies soon.
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.
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-reser....
The stock market craziness continued even with high rates .. wow .. didn't expect that.