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Comment by obblekk | Hacker News Reader

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.

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> 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.

> 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

> 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.

> 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.

> As the world became more stable over time, the default risk also lessened over time

I think these are both saying the same thing from two sides - the default risk going down doesn't really mean anything in isolation. The implied context is the default risk goes down for the same rate of return (or the rate of return goes up for the same default risk).

Why would anyone believe we’re in a new era of geopolitical instability?

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.

An industry basically can't ever make a profit is not a solution to anything.

So that would be a problem without a solution.

United Airlines making 10 billion a quarter doesn't sound like its in an industry that has no profit.

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.

All the goods and people transported won't mind that a few shareholders were unhappy.

They might be unhappy when the profitable business are all ran out of town and the unprofitable ones collapse leaving neither behind.

Do you think this will happen to the airline industry? Happily willing to take the other side of that bet.

Why do things that serve the public need to be profitable? Are roads profitable? Is sewage treatment profitable? Do you maintain that they should be?

If it's privately ran it needs to be profitable otherwise it will no longer be ran (at some point). Of course the privately ran business could change course at some time and become profitable (i.e. raise prices or discontinue unprofitable business lines / areas of service). But if that's the only X store left in town and they discontinue service, you're kinda screwed.

The same ends up being true for publicly ran things as well. Flint is a great example of a town that was not profitable and so Michigan stepped in and changed their water supply to decrease the towns cost (a scenario that would've been avoided if Flint wasn't broke, amongst other ways it could've been avoided). It's just that at the government level you can have many services that cost more than they take in (often because you just don't charge people for the service; which is fine) which get balanced out (eventually) by other "services" (often more general taxes) that take in more money than they cost.

If you live in a town and continuously it spends $X a year and takes in $<X a year, that difference is going to eventually cause a problem. Perhaps it means that roads will stop being repaired. Perhaps it means you'll have boil water notices all the time.

If they're not minimally profitable in some general sense, such that the benefits of building and maintaining them are not at least paid by the benefit of using them then no, they shouldn't be built. Unfortunately, when you factor in the externalities of carbon emissions, loss of habitat, and other biosphere stressors (the biosphere being the life support system for all life, including humans, and which we do not have the means to replace), then most human activity in living memory cannot pay for itself. This is sad, but we can't fix it until we acknowledge it.

We're using up our life support system when we build a highway or airliner, not investing in anything.

You could say that about the restaurant industry where people regularly lose their shirts, except a few players are consistently profitable.

Guess all that drinking water we have is just a waste then.

Highways too.

Airlines are unique in that they're essentially a public good that we've allowed to be a private market (look at how often the government intervenes in the industry).

That doesn't mean that airplanes are pointless.

Absolutely. The entire building-airplanes-and-flying-them "industry" is a side effect of their necessity as weapons of war and toys for rich people (same thing, really). There is no rational reason for it to exist, especially knowing what we know now, but we're not a rational species.

Why don’t you take a 30-45 day ocean journey to Asias over a 15hr flight then?

Airlines are not just a toy for the rich, in fact majority of the passenger traffic is shuffled around in economy.

Buddy replace “building airplanes and flying them” with “growing food and eating it” and you’re describing agriculture until the 20th century.

We’re humans. We fuck shit up. Our goal is to do it only when necessary.

Guess we need to shut down all the government subsidized schools in my country where tens of millions of poor kids study in every day.

Also shut down the unprofitable state funded hospitals for people too poor to afford private medical care.

Here are some example "solutions in search of a problem" airlines:

https://samchui.com/2022/05/30/worlds-top-10-strange-airline...

Airlines vs Silicon Valley are actually a good example of how the sort of business that is massively threatened by higher interest rates is often an actual real business solving real people's problems that just happens to be capital intensive, low margin and fairly predictable, not the solution in terms of a problem where the return on investment is claims of high margins and pure optimism.

High interest rates won't stop VCs looking for 20-40x returns under high uncertainty falling for a pitch about how everyone will use this dumb website in future, honest. (It might reduce the amount LPs put in and get out of VC as a sector, but there's no reason to believe this improves VCs' judgement)

But high interest rates are a major problem for an airline that has a few billion dollars of aircraft to finance, and lots of passengers but at low single digit profit margins.

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.)

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).

> (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.

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.

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.

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.

Reduced incentives for what?

What's the point in generating value if it's all being captured by the capital holding class?

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.

The chance to become part of the capital holding class.

Right, but incentives are reduced as this becomes less and less likely for any given amount of effort.

The capital holding class is “people with 401ks” and so includes you.

The capital holding class includes people who could quit their job and live purely off capital gains, so it likely does not include you

> 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

You can't have it both ways; either it takes decades or it's handed over for little effort.

You also don't need much capital to start a few small businesses. Obviously it depends on what you want to do. but it won't take decades to start a dog walking business, for instance.

All business requires working with other people, and other people have money. I started selling hair products in tandem with some guy I met at a men's shed when I was unemployed. The "right connections" isn't limited to your notion of "upper class" whatever that might be.

You can have it both ways if it's different people. The amount I save over 10 years is going to be radically different than the amount of money someone pulling a mil per year is going to save is going to be radically different than the amount of money someone working minimum wage will be able to save.

Right, but we're saying "enough to start a small business" which is similarly varied.

Is it upsetting that someone on minimum wage won't be about to become a tycoon overnight? Is it upsetting that people have to talk to others to convince them to give you money?

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.

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.

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.

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.

> 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.

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.

You mean they decided to keep inflation low which obviously also means lower interest rates in the long run.

Yes, this was indeed what I meant.

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

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