The weird thing to me that I've been seeing is VCs harping on inflation as a consequence of what they view as loose monetary policy with zero apparent sense of irony that the truly massive explosion of VC over the last 10 years is entirely because of not just all the top-end liquidity that's been frothing all over the place since QE began back in the 2008 financial crisis, but _also_ the fact that the net-negative interest rates on stable long-term investments effectively create whole new categories of LPs for VCs to chase that previously couldn't/wouldn't touch the VC ecosystem with a 10-foot pole.
Talk about looking a gift horse in the mouth. Or, perhaps biting the hand that feeds you? I dunno, I'm sure there's an appropriate colloquialism.
If QTmageddon is coming (something I personally think is a mistake since it seems like price inflation is being principally driven by supply shock dynamics, but I digress), then the first reckoning in the financial markets is almost certainly going to be VC. The risk profile makes absolutely no sense without a cheap money market.
Dry up? I don't think so. You'd see a change in the level of risk aversion (so doing more deals in companies that have been de-risked more) and probably quite a lot of consolidation where the massive increase in the sheer number of small & mid-tier players would contract significantly. In terms of timeline? No idea. Hopefully sometime after we need to raise our next round of financing. ;-)
Interest rates going up means future cash flow becomes less attractive compared to current cash.
This lowers the price of stocks and bonds.
The US Gov can't afford to pay more on its debt, so I bet the rates will be driven back down eventually by the Fed, and the USD inflationary debasement will continue (and prices will resume going up).
Failing this would lead the US to insolvency and a hard default, instead of the soft inflationary one.
Bonds yes, stocks are weird though because as you mentioned inflation can cause draw downs but it also has upward pressure as well do to rising prices of assets at large. Value stocks (firms with "now" cash flows), I believe tend to do well in an inflationary environment, verses growth (firms with "future" cash flows) stocks.
Right, future earnings are discounted by interest rates meaning if you're a company whose earnings are heavily weighted towards the future, ie a growth stock (think startups who lose money but have huge valuations based on potential future earnings), you can get decimated by rate rises.
On the other hand, if you are a consumer goods stock paying a dividend, your value is much more based on the cash you can generate right now and you aren't particularly susceptible to future discounted cash flows affecting your valuation.
Your comment contains a lot of info that is not the consensus view of economists and businessmen.
Yes, interest rates going up lowers the price of bonds because "interest rates up" is mathematically equivalent to "bonds are cheaper."
The notion that changes in interest rates, which generally correlate with inflation, would alter the price of stocks is not obvious to me. Not sure what mechanism you would propose that would cause that to happen.
The US Government has the right to print USD. The notion that they could someday be unable to pay USD-denominated debts is therefore obviously wrong. Also, it is very much in the interests of exporters like China that USD remain strong, and they will likely just add the newly-minted USD to their USD reserves.
When proposing financial disasters, you can take these same types of fears and make them more plausible. E.g. propose that the US Government will overspend, weaken the dollar, cause the dollar to lose status as a reserve currency, and force future US debt to be denominated in something other than USD. Or propose that a sudden increase in inflation might cause effective salaries to decline or be uncertain, leading to a decline in consumer confidence and a recession.
Inflation uncertainty worries me the most. But I don't think there are any nightmare scenarios coming soon.
> The US Government has the right to print USD. The notion that they could someday be unable to pay USD-denominated debts is therefore obviously wrong.
That turns into a hyperinflation, though - where you print the money to pay the interest on the debt, but that creates more inflation, so interest rates go up, so you have to print more money, which creates more inflation...
The end of that process is often a total loss of confidence in the government. That in turn often leads to a change of the form of government - usually not for the better.
Hyperinflation happens when you print USD to pay non-USD-denominated debt, because you'd have to print an infinite amount. The interest rate describes how much you have to print to pay USD debt, and it's consistently not been much (or even a negative amount) for decades.
> That in turn often leads to a change of the form of government - usually not for the better.
If this is a veiled reference to Nazi Germany, that was not Weimar inflation, it was caused by deflation later. Why hard money people are terrified of hyperinflation instead of deflation, when that's worse, I don't know.
An example of a country that does everything wrong economically and has constant inflation is Argentina, but oddly it's still there and nobody seems to be overthrowing it.
It's not the only way to get there, but it is the fastest way, and an important difference between large and small countries is the US doesn't have this problem.
> The notion that changes in interest rates, which generally correlate with inflation, would alter the price of stocks is not obvious to me. Not sure what mechanism you would propose that would cause that to happen.
Higher rates -> reduced accessibility of personal credit -> lower spending -> lower corporate revenue -> higher cost of borrowing -> higher cost of debt service -> lower profits -> stock price
Rates act as a global parameter that impacts performance of companies differently, with the consensus understanding that it impacts debt-fuelled (or what we now usually call growth) companies the most.
This. As bond rates rise capital moves out of stocks over to bonds. Bonds are higher in the capital structure as well. When bond rates go absurdly low capital moves into stocks (as we have seen).
Doesn't matter. People don't invest exclusively in one of stocks or bonds, but diversify. A higher interest rate might make bonds slightly more attractive on a continuum.
Unemployment rate is meaningless in the face of labor participation rates that swing by 10’s of percentage points. us average person is so rich, they can deleverage their labor, retire early etc. no amount of qe or qt will make a dent if people decide they want to relax for a while.
When everyone else is deleveraging their labor, it’s time for people willing to work to reap the rewards.
The US labor force participation rate does not swing by 10's of percentage points. During the pandemic it fell from a little over 63% to a little over 60%. Over the long term, it was above 58% in the 1950's and topped out around 67% in the early 2000's.
Median net worth in the US is $120,000, which includes home equity. You can't retire early on that.
The largest football stadium in the US holds around 108,000 people. If Bill Gates and 107,999 minimum wage workers attend a game there, the mean net worth is over 1.2 million dollars. How many of them are retiring at 50?
Median net worth is what you want here not mean, right? Median net worth at age 50 is around $150,000, also, I think, including home equity. Still not going to be retiring early.
People around the world regularly retire with far less than $150k.
Also the median us worker earns over 2 million dollars in their lifetime. Most chose to spend it as they earn it. A lot more of them could certainly reduce their consumption if they really wanted to. Of course a lot of them self selected into the us, and like working harder than the people they left behind.
If you look at what financial advisors suggest, it is to take around 4% of your net worth per year as income. Some suggest a little more, some a little less, but that's the ballpark.
4% of $150k is 500 dollars a month. Would you retire on that? I wouldn't. Could you retire on that?
I know a guy who is retired and gets $600 a month Social Security. His heat is out right now, his furnace died. It's single digit temps right now, he's got space heaters going. He's trying to get the furnace fixed, if it has to be replaced, it's going to be $15k.
How is that going to happen? Me and his family probably, we've got him, but for people that don't have that?
No, people in the US don't retire early with $150k unless there is no other reasonable choice.
Keynes advocated government borrowing and spending during a recession to cushion the decrease in aggregate demand. Critics of this deficit spending claim that the market should in the long run correct itself to which Keynes famously responded "In the long run we're all dead."
The U.S. government did this type of deficit spending in 2020-2021 printing and spending a large amount of money/debt which moved future spending to the present.
If rates are going to rise, is it better to hold cash and use loans for purchases such as land, or is it better to pay cash up front now and invest the cash in money market funds or other financial instruments?
Honestly it's kind of a wash. Yes, rates are dirt cheap right now. Basically every asset out there is priced (high!) with this in mind. If rates were to rise, asset prices must naturally come down as people can afford to borrow less.
If you don't have an emergency fund, now is the time to build one. Breaking inflation is a painful process that will eventually lead to a bad recession. Things will get worse before they get better.
Reducing inflation by raising interest rates is indeed painful because it basically works by making everyone unemployed so they can't ask for raises. This is, as you can see, a bad idea and a violation of the Fed dual mandate, which they for once aren't ignoring.
Reducing inflation by raising interest rates makes money more expensive, which hurts those that need to borrow it and benefits those that can lend it. Higher rates also make assets cheaper to buy as less leverage can be brought to bear in bidding. Anyways, the fed should have raised rates when the economy was good (and not just good because money was cheaper), so they could reduce them when the economy was bad. These days, we are all just addicted to cheap money and all fiscal discipline has been thrown out the window (cut rates in bad times and good!).
The economy hasn't been good anytime recently until 2019 or so. Unemployment consistently improved over time far past any mainline economists predicted, especially the Larry Summers types who ran the 2010 recovery. Maybe they should've lowered the rates then so they could raise it later - they certainly didn't do enough stimulus.
There are weak models behind all of this at best; "cheap money and fiscal discipline" isn't even a model, just moralizing, but the actual arguments about fiscal policy use things like "potential output", which has assumptions like "the economy will overheat if black people have under 10% unemployment".
As for current inflation, it's not yet enough to ruin the Fed's decades long record of undershooting the 2% target, but it is caused by an ongoing natural disaster and not money printing. So to fix it, you can try fixing the natural disaster…
Even in 2019, Trump pressured the Fed into not raising interest rates, saying they would make the economy crash. Trump is hardly alone in blame, Obama, Biden, and Bush are just as bad.
Money has been cheap since 2008. Did everyone expect it to be cheap forever without consequences? COVID just blew down a house of cards, fixing COVID isn’t going to magically fix our inflation problems, the house has already been blown down and it will take another decade of fiscal discipline to build something sturdy back up again.
It should be possible to achieve better employment without punishing savers and rewarding debtors.
The question you have to ask yourself about building an investment strategy around rising rates is: How much will they rise, how fast, and where does that quantity of increase on that schedule actually have an impact on my decision?
If you are looking at a 5 year time horizon will the changes in rates be enough, or fast enough to make a real difference? I personally doubt it unless an external shock acts on the market -- which of course could also cut the other way!
Oh. That was not at all what I expected from the title... I thought it would be about either the new QML compiler, or the desktop-advertising library. (Though the domain should of course have been a giveaway. Didn't notice that at first.)
I figured it was something about cardiac health, where the "Q-T interval" between two EKG landmarks is an important diagnostic indicator. I also didn't pay much attention to the domain.
If this isn't handled right, all of us in the US will have to face the consequences of no longer being the world's reserve currency, and the failure of the petrodollar.
In the long run, that would also mean the end of the American Empire. and all the defense spending that goes with it.
Unlike the Great Depression, this time we don't have the worlds largest supply of oil, the biggest manufacturing base, or anywhere near reasonably competent Governance to ride out the consequences of the ensuing crash.
You'll look back on the plague years, and remember them as the calm before the storm.
I think you underestimate the US military a lot. The petrodollar or whatever is only powerful because the US is able to protect economic interests with its military power. Last I checked the next best countries are a decade or more and several hundred billion dollars behind. Although, a good argument can me made about internal fighting and political in-fighting and weak stomach of the US voter-base, which can be remedied with the next Iraq/vietnam.
Several parties playing a game. One plays chess, the other Go, and yet another checkers. Long term victory,Long term dominance and permanent superiority or win a lot of short term battles and exhaust your enemy. I don't know who will win but make no mistake this is a war, if not cold then maybe deep-frozen.
Your worldview seems to be from the 1970’s. I do not mean that as an insult; you’re just wildly out of date in terms of understanding modern geopolitics.
The US military today is a bloated, inefficient force sucking up resources that would be better spent elsewhere. They’re funding blimps to watch drug smugglers at the US border, for Christ’s sake.
The populace of the US will not stand for additional military adventurism on the scale of Vietnam or Iraq. Trump started the process of withdrawing from Afghanistan and was lucky that Biden got stuck with the mess Trump made of it. It was forecast to be a broadly popular move and would have been had execution been slightly better handled.
There's no way to "better handle" leaving your corrupt puppet state to fend for itself after decades of fighting the will of the people who wanted a native Islamic government with their cultural values to rule. Americans universally fail to understand how unpopular we are abroad, how awful our low regulation capitalist values are, and how our military is seen as the murder machine that keeps our world-wide bullying going. There was never political will or loyalty in the puppet government or puppet military we built in Afghanistan. The only question was who was going to hold the bag when we finally had to leave.
The only good way to do this was to never invade and conquer but instead to chase ObL and capture him and fight the Taliban only as needed. How Bush got out of any responsibility for his reckless adventurism, not only here but the unforgivable tragedy of endless war crimes and crimes against humanity his Iraq invasion was, is the real tragedy here not Biden's "execution" somehow being sub-par. Per usual Democrats have to clean up after Republicans.
> There's no way to "better handle" leaving your corrupt puppet state to fend for itself after decades of fighting the will of the people who wanted a native Islamic government with their cultural values to rule.
Decimate the country and leave ASAP. Rebuilding and making sure terrorists aren't harbored again is between the people and their new government. Either permanently occupy or leave after decimation. Half assing it like with vietnam will always end in wasted lives and resources.
Hey man, Obama had 8 years to start a pullback. Otherwise I agree though. America probably seemed like a rainbow painted boot stomping on a human face forever.
In every conflict since WWII the US mil won conventional war and it has a better fighting force and weaponry than any country (and bases+carriers+allies). What they lost every time is public support for the war long after dominance and/or invasion has been established.
I mean, look at afghanistan, the war ended in 2004. The US could have declared that country their new territory and every conflict would be domestic terror. They did not need to stay after 04, they stayed to keep the place stable not to defeat the taliban (which militarily, they did).
MMT DOES make sense, as long as you are careful to qualify who it's making sense for. If you are a congress person with a very short term time horizon MMT makes a whole bunch of sense. Incidentally, our country is run by congress people with very short term time horizons.
If you are anybody else besides maybe a defense or infrastructure contractor MMT does not make any sense.
This comment is disaster porn for doomers, preppers, and second comers. Being the 2nd largest manufacturer isn't good enough? Having history's most powerful military isn't good enough? Having $63k gdp per capita during a pandemic year isn't good enough?
>You'll look back on the plague years, and remember them as the calm before the storm.
There's zero evidence this will be true. If anything we'll see this as the dawn of chasing fascism out of the country and a rise of class consciousness for workers and what work life means and how wealth disparity hurts us all. I find the doomers of the world fear exactly this and pray for a collapse than see a leftward swing as millennials and gen-z take power from the doomer-friendly ultra-conservatism so many in the USA accept uncritically.
> >You'll look back on the plague years, and remember them as the calm before the storm.
> There's zero evidence this will be true. If anything we'll see this as the dawn of chasing fascism out of the country and a rise of class consciousness for workers...and how wealth disparity hurts us all.
When Russia and China had a "dawn of chasing fascism out of the country and a rise of class consciousness for workers and how wealth disparity hurts us all," that was "the calm before the storm." The storm included GULAG, the Holodomor, the Great Leap Forward, the Cultural Revolution, the greatest famine in human history, decades of economic stagnation, and ultimately civilizational collapse in Russia.
PRC escaped that fate because, after the Cultural Revolution, class consciousness and eliminating wealth disparity went out of fashion, and consequently it went from being one of the world's poorest countries to one of the richest.
When videos of Americans tearing down statues went viral a few years back, lots of Chinese people thought it was hilarious that the Cultural Revolution had come to the US.
The USA is not a totalitarian communist regime. A move leftward for a Democratic capitalist society is modeled on Nordic states, which have the highest outcomes in the world in terms of nearly everything good for humanity. Comparing US liberalism to 1920s communism is highly disingenuous and makes me unable to remotely take your comment seriously.
Ah, the old "socialism with Scandinavian characteristics". Never mind that e.g. Denmark has some of the highest scores in economic freedom, I wonder how some people square that fact with their contention that Denmark proves "socialism works".
There's nothing disingenuous about my comment. Your completely baseless insult to my integrity should not have been posted on this site and will not be forgotten.
The Nordic states are not based on the rise of class consciousness. They are capitalist countries, by some measures among the most capitalist in the world. Nor are they especially based on chasing fascism out of the country, except in the sense that their current governments were established after the Allies chased the Germans out during World War II. (Except Sweden, which remained neutral.) None of them have explicit laws against Holocaust denial, for example, which are typically the first resort for chasing fascists out of the country.
And none of them have in fact chased fascists out of the country. Even though founding fascist parties has been illegal in Finland since they kicked out the Russians in 01944, no Nordic country has banned Sverigedemokraterna (literal Nazis), Bevara Sverige Svenskt (even more literal Nazis), Alternativ för Sverige (expelled from Sverigedemokraterna for being too Nazi), Norsk Front (literal Nazis that became less popular after they started bombing things), Sverigepartiet (intermediate literal Nazis), Vitt Ariskt Motstånd (a literal Nazi criminal gang), Kohti Vapautta! (literal Nazis), Norges Nasjonalsosialistiske Bevegelse (such literal Nazis they actually have "national socialist" in their name), Danmarks Nationalsocialistiske Bevægelse (literal Nazi party sort of going back to the 01930s), Vigrid (literal Nazis), the Norsk Hedensk Front (literal Nazis), Boot Boys (literal Nazi murderers), the Svenskarnas parti (former literal Nazis), the Folkfronten (literal Nazis), the Nationaldemokraterna (arguably Nazis), Nationalsocialistiska Arbetarepartiet/Svensk Socialistisk Samling (the WWII-era Swedish Nazis that drew up lists of local Jews for when the Nazis invaded), Danskernes Parti (literal Nazis), Stram Kurs (Quran-burning party whose objective is genocide against Muslims), Nordisk Styrka (literal Nazi violent criminals), Perussuomalaiset (fascists with 38 seats in the Finnish parliament), Sinimusta Liike (expelled from Perussuomalaiset for being too fascist), Dansk Folkeparti (an anti-Muslim party with 16 seats in the Danish parliament, resulting in Europe's strictest immigration laws), Sinivalkoinen Rintama/Vapauspuolue (ultranationalists), Suomen Kansan Sinivalkoiset/Finlands Folkets Blåvita (ultranationalists now merged into Sinivalkoinen Rintama), Odinin Sotilaat (anti-immigrant vigilante criminals), or the Svensk Hednisk Front (literal Nazis), and only Finland has banned the international Nazi terrorist conspiracy Nordiska Motståndsrörelsen/Pohjoismainen Vastarintaliike (since 02019). Sweden banned the uniform of the Nationalsocialistisk front (who are also literal Nazis, as you might have guessed from the name) but not the actual party.
So if you want to start expelling US citizens from the US because they have shitty politics, well, I know where that road leads, and it isn't modern Nordic states. Governments are the only organizations capable of chasing people out of the country, and by their nature, they aren't actually capable of discriminating against people with shitty politics; the closest they can come is to discriminate against people whose politics conflict with those of the government.
Neither Russia nor China was a totalitarian communist regime before their "dawn of chasing fascism out of the country and a rise of class consciousness for workers and how wealth disparity hurts us all." The totalitarian communist part came later, as a result of that "dawn".
The atom of truth in your farrago of falsehoods is that the Nordic countries have among the lowest economic inequality in the world. To some extent this is a result of economic redistribution policies and the accompanying high tax rates, but to a very great extent it's a result of liberalism, which allows ordinary people to achieve prosperity by working for it.
I don't think this is the risk. The one thing that is very much with in our control is the trade off between inflation and market "health" (price levels).
At the end of the day, we can make any prices on the SP or QQQ nominally sustainable, the lever being the value of the dollar, and when faced with an existential threat to markets and to the dollar, we are going to pull that lever every time.
All in all, I think the dollar will decline slowly as the rest of the world becomes less interested in holding our debt, not in an own goal melt down.
I'm deeply confused, why would the US unwinding QE and raising interest rates do anything but good for the USD?
It's not like there are other countries out there who both have the capacity to be the worlds reserve currency and are financial role models. If the US gets serious about fighting inflation, we might face a recession, but our currency would be very strong.
Let me ask you this, if the world does wish to replace it, what currency will they chose? Really. Look around. Everyone is printing money.
> why would the US unwinding QE and raising interest rates do anything but good for the USD?
On first order effects yes, but first order effects are not the whole story. If this severely blows up markets, it wouldn't matter that we prevented inflation for a few months. The response to that blowup would probably be massive stimulus and therefor future inflation.
> Let me ask you this, if the world does wish to replace it, what currency will they chose? Really. Look around. Everyone is printing money.
A single global reserve currency is far from a fact of history. You could easily argue that whatever the dollar is right now, has never existed before. I don't think Sterling maintained hegemony through anything like petrodollar recycling.
So what currency will they choose? Probably a lot more currencies. Why shouldn't Japan trade oil in Yen. Why shouldn't China trade oil in RMB? Thing have already been moving in this direction for a long time anyway.
No other currency replaces the dollar. A more complicated system is what replaces the dollar.
Probably gold, which was the world's reserve currency from about 00500 BCE until 01971 CE, 51 years ago. Bitcoin would probably work, since its printing is finite and extremely predictable, but politically it's unacceptable to China right now, and it's only 13 years old, so it might collapse in a way that gold probably won't.
Internet would always exist in a future world with basic hierarchy (that is to say, we didn't go into nuclear winter), your skill would still be in need.
Ask yourself how much a job should pay you to be okay with sanctioned killings. Then think about doing it in a none wartime environment, vs what modern war may look like.
This makes me wish we had competent leaders. Who have meaningful discussion. Who do what they can to avoid wars of both physical and spiritual conflict, by a countries own avarice.
>Ask yourself how much a job should pay you to be okay with sanctioned killings. Then think about doing it in a none wartime environment, vs what modern war may look like.
I'm not an economist, a lot of mismanagement and kicking the can down the road is about to unwind. The folks at the top don't seem to realize how thin the veneer of civilization really is. They finally gave in to Roosevelt, and he saved their ass in the 1930s. I doubt this time will prove as lucky.
The standard advice, pay off all debts, have some cash on hand, stock up on food, fuel, toilet paper. Make friends with your neighbors. Have skills that will be in demand, like being able to fix things.
If civilization collapses, 7 billion people will die, at least.
The economy contracting 90% is a possibility, and if your income goes to zero, you don't want to lose what you have left because of a loan you didn't think you'd actually have to pay off.
If the economy contracted 90% you wouldn't have to pay any loans because the loan collectors would be dead. This is sort of like "if you owe the bank a billion dollars the bank has a problem".
Having assets and precious metals, though cliche, wouldn't be bad to have either since they'll at least be worth something even if the USD lost all value.
Gold historically. Bitcoin is arguably in the best position to be the new global reserve currency though, assuming infrastructure doesn't collapse along with the USD.
PRC thinks Bitcoin is the devil, and it's the world's largest manufacturer. I don't think you'll see Bitcoin as the global reserve currency until after Xi and maybe his heir die of old age.
Talk about looking a gift horse in the mouth. Or, perhaps biting the hand that feeds you? I dunno, I'm sure there's an appropriate colloquialism.
If QTmageddon is coming (something I personally think is a mistake since it seems like price inflation is being principally driven by supply shock dynamics, but I digress), then the first reckoning in the financial markets is almost certainly going to be VC. The risk profile makes absolutely no sense without a cheap money market.