Why is everything going to shit?
Why is everything going to shit?
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???
Literally money. More specifically, the financial need under a capitalist system for businesses to constantly grow and increase profits, and to focus on shareholder profits over making a good product. Most businesses on any sort of large scale today aren't in it to do a good job at making whatever it is they make, they're in it to make money. Their actual 'business' is just an incidental stop on the way to making more money.
You see this literally everywhere. Remember Odwalla? They made these great, super-thick bottled smoothy-like juices. Easily the healthiest thing you could find to drink in most of the places they were sold. Then Coca-Cola bought them out, changed the name to Naked Juice, and watered them all down. What we have now, as a result, is a pale imitation of what we once had.
Why? Because Odwalla was profitable, so it was profitable for Coca-cola to buy up a competitor for shelf space. But once they were bought up, there's no incentive to deliver the same quality of product. They have no remaining competition, so they can release a shittier version and we'll basically just suck it up because it's still healthier than soda.
Our reward for worshiping currency is for everything ever made out of love of a craft or an art to be exploited and turned into a shittier version of itself.
The solution, to my reckoning, is to start making things you love because you love to make them and to refuse to sell out when they come knocking.
Cory Doctorow (pluralistic.net) has a number of stories now on the concept of “enshittification”. Basically businesses start off being good to customers but eventually get to a point where, if they’re dominant the drive for endless profit results in them turning to squeezing suppliers, customers, everyone.
Tech enables new forms of exploitation.
Cause 1% of people own 99% of everything. That's never going to not be a shitty situation.
But also shit has been bad for marginalised groups since like forever. Now we're all just getting a taste of that as our masters pull the ladder up from under them.
It's cyclical and it's been happening for thousands of years. It's part of our human nature.
We all work together and build systems, societies and civilizations and do great things. We become wealthy and then slowly concentrate that wealth to smaller and smaller groups of people. Eventually the majority of the wealth is controlled by a very small group of people and everyone else has nothing. The system at this point can not sustain itself and collapses. Then the whole human system restarts again from the bottom.
It's happened many many times throughout human history.
We are just at the height of one of those cycles.
Zero interest rates meant that speculative investing (for the purpose of selling later for more money, not for any dividends a company might pay from any profits) with lent money (aka leveraged investment) was pretty much a risk free proposition since loans with zeto interest rates cost no money to maintain. (You and me don't have easy access to loans for investing from the money markets but the kind of investor we're talking here does)
Interest rates go up and that lent money now has significant costs associated so investing with lent money (and nowadays that is most of investing done at professional levels) now has to produce enough returns to pay the interest on the loans hence all the pressure for companies to generate profits.
(Note that money from the money markets is typically on much shorter terms - and loans usually are rolled-over into new loans on maturity - than consumer loans, so interest rates on those respond much faster to changing base interest rates than for consumer loans)
(Also the companies themselves also have loans that they now need to pay interest on, which adds a more direct pressure to start having a positive cashflow)
As for central banks raising base interest rates to combat inflation, the idea is to literally make people have less money available (I kid you not: people are supposed to be made poorer) so that they don't buy as much, and that reduction in Demand will cause prices to fall.
Edit: I was thinking about this and realised I had moved the ??? around but not clarified it all. Specifically, how do we go from "speculative investors having less cost-free money" to "companies which have eternally been in 'investment phase' (i.e. losing money whilst promising they'll one day be the greatest thing since sliced bread) being forced into trying to actually have profits". Well, for the stock price not to fall too much (which might lead to a rush-to-the-exits, a feeback-cycle were the more money that exits the less the worth of the stock, so the more money exits) and as speculative investors are fewer and/or have less money to invest, they have to appeal to more traditional investors, the kind that judges a company's worth by their (stock-)Price-to-Earnings ratios (which, by the way, is a ratio that the smaller it is the more appealing a stock is to buy), so to have good P/E ratios without the Price side going down, the Earnings (basically Profit) side has to go up, hence the need to generate some profit (notice that the P/E of a company without profits is INFINITY), which is what pushed them to try and come up with profit NOW to hold their valuations and sometimes even at the cost of future profitability.
This also links with another element I forgot to mention early: the "climb up the yield scale". In simple terms (as much as possible) - most of the money out there not in the hands of States is owned by two kinds of entities - Pension Funds and the Rich (which, given the extremelly uneven distribution of money actually own more money than everybody else combined) - and they're not just putting it on a bank and getting Savings Account interest on it, they're looking for ways to make money from money. Now, back in 2010 when Central Banks "rescued" the Economy through their Zero Interest Rates Policy, that money which was mainly parked in the safest of investments (Treasuries, Investment Grade Corporate Bonds) started getting puny amounts of interest, eventually even losing value (remember how the Treasuries of many countries started having a negative yield - i.e. you paid those countries money to hold your money?!) so they started going up into riskier and riskier asset classes seeking a higher yield (i.e. higher returns on their investments), up and up into Junk Bonds, Stocks, Realestate, Tech Stocks, Startups and even really exotic asset classes like digital "coins" (I very much doubt there would ever have been a Bitcoin mania without all that money seeking yield due to ZIRP), all of which is the "climb up the yield scale".
Now the "climb up the yield scale" sounds like the opposite of what would make companies which are mainly speculative investments try to make profits because it is exactly that: the rise of baseline interest rates reverses that trend - it makes safe financial assets more appealing (holding Treasuries now actually pays interest, not cost interest, and just up the risk scale investment grade corporate bonds also pay more) which is pulling all that money down (remember, rich people and pension funds: they're usually quite averse to losing money, i.e. more risk averse that, say, Investment Banks, especially old-wealth) and out from the higher-risk and more speculative investment classes, noteably Startups (and further down Tech Stocks and even Realestate). This again puts pressure on companies which were so far profitless to produce profits: it makes them look safer hence retain some of the investment which had before climbed the yield scale when the safest of investments had ridiculously low (even negative) returns.
There are actually yet more ways through which higher interest rates feed into speculative companies trying to put on a pretty face by actually having profits, but this post is more than long enough already ;)
I personally think that everything has always gone to shit. But in the downfall, new things will take over until that goes to shit. Or maybe because there are new things the old things will go down.
Take the example of video stores. They used the be the best thing ever. Rent all the movies you would like to see for a small fee per movie. Then downloading and streaming came along. Streaming was cheaper and more convenient. Result: video renting business went to shit.
Then the streaming services started to raise their prices. It started going to shit. Soon new ideas/companies/services will swoop in and the cycle will repeat again.
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!
I think as we get older we just notice more and more. Things are bad but relatively things are also good. Take the bad and the good. Others here are explaining the economy stuff, that explains housing and our tech woes, blah blah blah
Stay informed, fight the good fights, but also take the small moments to stop and think about the positives in your life too. Your family, friends, what you find solace in. There are a lot of negative things, and social media really likes to focus on the negatives, but remember your personal positives too.
Most bizarre financial decisions can be put down to greed, or stupidity. Usually both.
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???
Few, if any, of the big tech companies were playing out any kind of dividend to investors. It was more that they were content for companies to maybe someday make money as opposed to actually making money,
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???
I'm not an economist, but this is how I understand it works. If interest rates are low and your company can deliver 2% returns to investors, more people will invest in your company rather than leaving their money in the bank. Your company can ALSO borrow money from banks at near-0 interest and deliver a 2% return on that borrowed money (I'm probably over-simplifying, here, but I hope not by too much....). Basically, after building and selling more of your product thanks to the borrowed money, your company will have enough to return the money they borrowed from the bank and then some. If interest rates are 5%, your company now needs to be much more profitable for the whole thing to work.
This is why I understand most companies (even big and solid ones) have what is considered a "healthy" amount of debt. As long as your company can earn enough to repay that debt and keep something, not taking that debt is considered a lost opportunity.
If you're a start-up, though, you're almost by definition not profitable to begin with. You need money in exchange for a promise of big future profits. Access to that money becomes a lot more challenging with higher interest rates, so you might not be able to operate at a loss for long enough to turn profitable.
EDIT: as I see a lot of discussion on speculation, stock market and such. While these elements do exist and magnify the effects of the higher interest rates, I think the basic mechanism can also be explained without them. Low interest rates are a way of pumping "free" money into the economy, when you stop doing it, the economy goes to shit in various ways. For instance:
You have no job but own a car. You plan to drive to the countryside, buy $100 worth of potatoes and resell them in the city for $110. You estimate that gas will costs you $4. You have only one problem, you don't have $100. But hey, interest rates are super-low! You can borrow $100 from the bank and give them $101 back after selling your potatoes, so you're good to go! In the end, you're $5 richer, as you've spent $105 and earned $110.
WAY #1 things go to shit: if rates had been higher, you wouldn't have even be able to start your business (low interest rates attract more new businesses to the market)
Now say you want to do this again. Your net worth is no longer 0, you have $5! Can you buy $5 worth of potatoes and go on without borrowing any more? Not worth it, you would barely be able to cover your gas costs. So, even if your business is overall profitable, you still rely on borrowing. Given your earlier success, if anything you will probably want to try borrowing more and go for $200 worth of potatoes this time! Note that in this example you started with an owned car; if you'd had to buy one, it would take you years to repay the car and start actually turning a profit.
WAY #2 things go to shit if rates get higher now, you will have to shut down your business. You will still have earned some money, but you can't continue
Fast-forward a few years, your business is moving about $1M worth of potatoes You buy them for $1M and sell them for $1.05M, earning a cool $50K. From your years in the potato business, you have accumulated $200K in cash. Now, if you want to buy your $1M worth of potatoes, you still rely on the bank to lend you money. OR at this point, you could scale back your business and only use your cash reserves to buy potatoes. You would buy for $200K and make $10K every time. But rates are still so low and demand for potatoes is still very high, so why wouldn't you borrow and make a $50K profit instead? Or, by borrowing $2M maybe you could buy a field and start growing your own potatoes (since the farmer started raising his prices).
WAY #3 things go to shit if rates get higher now, you might still have a sustainable business, but you will need to scale it back and probably cut some costs. Maybe not too shitty for you, but probably not great news for the people you've hired to help you ("guys, due to difficult market conditions, our business has now 5 times less profit and we have to downsize")
And I haven't even touched on how an unexpected event, let's call it Schmovid, can leave you with $1M in potatoes that you've already paid but nobody can buy any longer. Your $200K savings have been wiped and now you're $800K in debt with the bank. You're starting to recover and.... NOW the borrowing rates get much higher.
The problem is that money is permited to generate money. So the more you have beyond the threshold to sustain yourself the more you can generate without labour. The business with no interest loans accelerates things but it isn't the problem. It is that the system rewards idle investors at the expense of those whose labour actually generates value.
Capitalism wasn't fine until someone broke it. The core concepts behind it are flawed.
Capitalism, its bubbles and inflations.
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Companies are competing with each other to maximize profit. If there aren’t new markets for them to grow into, companies can only grow by reducing cost and bringing in more revenue. As such they make shittier products while also pushing prices as high as they can go. This is an unfortunate consequence of how capitalism works.
Because rich people want to make more money.
Neo-liberalism
Our societies have been built around our economies. The underlying premise of our economies is that they must always grow in the long term to sustain itself and generate returns.
Permanent growth is not sustainable. Nothing in this universe just grows forever without significantly changing state. Not even the universe itself or imaginations do that.
Resources are finite and at some point, the costs outweighs the returns. The choice then is how quickly to shrink. A sudden collapse is the most dangerous option but possibly the fastest before returning to growth, a slow shrink is less destructive but for a much longer duration and it may not be fast enough to prevent outright collapse. This is where we are right now, and why banks are tinkering with rates.
The question for me is: Will tinkering with our economies slowly be fast enough to outpace our outstanding environmental debts and the interest accruing on that.
lemme tell you about a special gorilla from Cincinnati
Very generally, you use the central bank rate to control the money supply. You increase it to remove money from the economy.
Even money is affected by supply and demand. Too much money in the economy is one of several things that can cause inflation -- for example because a surplus of money means people value money less and goods/services more. As a result, the value of goods/services as measured in money goes up.
Sadly, these are macro-level problems. Personally having a surplus of money sounds great, but the actual amount of extra money I made during Covid was not that much -- but give that much money to 100 million people and you're going to have inflation (I live in Vietnam where the economy was not seriously impacted).
Greed, deregulation, and at least in my country, the powers that be don't give a shit about the plebes, but have incentives to destroy the world to feed their already overflowing bank accounts.
There isn't an easy statement that explains why things are getting worse.
The housing market, for instance, was being affected by low interest rates. Low rates make being a slum lord more profitable than other forms of investment. This caused a massive amount of investment in the housing market by rich people and corporations, and normal people were priced out.
The banks that failed did so because they either invested in dumb things (crypto) or in long-term bonds. Those bonds lose value as interest rates rise, and SVB invested far too much into them.
There's all kinds of reasons
Simple, the world already ended and we are feeling the slow burn.
Too many humans on the planet to be sustainable. People will start dying en masse in my lifetime, that's just mother nature correcting things as she always has.
We were on borrowed time since humans discovered agriculture and the fun is over now.
Based on what you've posted here alone:
Companies that don't have to be profitable is not quite the case to make. They have to either provide a service valuable enough to gather continual revenue from investors or subsidies to exist... or they have to have a plausible promise of becoming profitable. Easy money really lowers the bar on how plausible that promise needs to be.
Ripping up on that E brake by hiking interest rates has a twofold effect: first it raises back the bar on how useful a service or profitable a company is or aims to be for investors. Secondly it has an overall effect on the economy, including profitable companies with strong investments since all loans are subject to the interest rates. So while that can produce the intended deflationary effect, the whole economy has to recalibrate.
And that's where things tend to feel like they're going to shit.
Too many reasons to list so I’ll add another
Stocks are only ever allowed to go up, if they go down you risk death
Covid caused massive increase in some stocks, now those companies need to find new ways to create revenue from the base they had prior to Covid to out match the base they had during it
Some companies had drop in stocks during Covid, they need to make it up to their shareholders so they don’t lose confidence
Race to the bottom.
Planet Money has a lot of good podcasts about this.
If you’re curious about the problems that surrounded low interest rates, this is a good one.
https://www.npr.org/2023/04/14/1170103587/interest-rates-mortgage-summers-blanchard
We are living in an universe with multiple possibilities.
We are the most powerful and capable animal on known universe. We set the rules. Considering we treat others animals with cruelty, forced labour, enslavement and mass murdering, we definitly rule with power abuse. Then, elites are doing to us just same we do with less capable living beings.
Justice is important, not?
DRS GME
I'll keep it short : Greed
Because you're online way too much
There was a global supply chain shortage due to COVID. This meant that the demand for everything backed-up. This was compounded by people having more time at home and potentially more money to repurpose from services to goods, so the shift also drove up demand. When there is more demand for goods than the amount available, the cost of goods sold goes way up until you reach a threshold where people are forced to buy less or go broke. This is the elasticity of demand. Their is a point where certain goods are no longer appealing in price or affordable in general. It’s really bad when these are mandatory commodities like food.
This runaway inflation is always dealt with in the same way. The central bank raises interest rates for their notes/loans that they make with the banks across the country. This makes consumer and business loan interest rates rise, which makes them less appealing and also staves free cash flow, so people have less money to spend from loans, but potentially their salaries might be affected as well. This has the benefit of forcefully lowering demand. Whenever demand goes down, the cost of goods will start to go down. During the lull of demand, the supply chain can catch up as well. This is not the first time interest rates were raised to fix runaway inflation. Over time, interest rates will go back down again. It is cyclical.
One difference though is that the government is also in a cycle of under-regulating and over-regulating business. At the moment, we were promised more monopoly-busting and cracking-down on driving up prices in a collusive manner to fight the fed’s deflationary tactics and attempt to make windfall profits. Meaning, whole industries are not supposed to band together behind closed doors and agree to not lower their prices. That is called collusion and is supposed to be illegal. As long as that keeps happening, interest rates will keep getting hiked. The current administration seems to have more of a tolerance for this than they should. If things are going to shit, it’s due to this type of corporate cronyism with the government.
Additionally, you have outside actors like China who are buying up land and businesses and contributing to the turmoil in clever ways like making housing and food less affordable.
Source: Am MBA.
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???
There's a bit of this, but it's not the main way everything ever worked.
The hiking interest was to combat inflation by discouraging people from borrowing and spending, but the reduction in spending can also push some companies out of business and start a recession. The economy isn't booming but we don't have a global recession yet either, so I'm not sure I'd even say they're "going to shit" at the moment.
Different entities rely on each other too much, so when a number of them have gone down, it began to drag the rest down, like a human tower that could no longer hold itself up. It doesn't help people think nothing needs to change about their economy, like maybe add a few rules on how it works, no reform needed. But no, apparently it's perfect.
Cheap credit twists the market and leads to inflation in the longer term. They knew exactly what they were doing but they did it anyway.
I'm not sure the explanation is true. It basically says that "lots of people" invested in Ponzi schemes. That's usually not the case. Stock returns or dividends are based on the operating profits, not the balance from new investors. It would require that companies deliberately fake their financial statements, and while that probably happens, it's definitely not the explanation for why "everything" went to shit overall.
It's true that the low interest has caused people who have money to place them in investments and that this may have overinflated the value of some companies, or that the money is placed in more risky companies.
The second part is also true. Central banks are increasing the interest rates in an attempt to bring inflation down.
Overall, the idea is right that inflation, interest and investments are tied together, but it doesn't really explain why everything is going to shit.
Because 2013 happened. And 2013 was bullshit. I'm sure Adobe Creative Cloud, iOS 7 and the Xbox One would gladly explain that to you. Oh, and I forgot Vine. I mean, it was really good, but it basically led to Musical.ly, which led to TikTok. YouTube also got rid of the customisable channel page, instead giving us a simple banner instead (I said instead 3 times now). And did I mention fingerprint scanners on phones? I'm sure you all remember Facebook Home. You don't? Well, you're better off not remembering it. Also, they killed Brian Griffin only to ressurect him from the dead all of a sudden. And finally, Office 2013. There's nothing wrong with it, it just looked like garbage.
All of this led to the dystopian lifestyle we're currently living in.
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All of the "grrrrrr human nature bad!" people are blissfully unaware for how long ruling classes or even the same lineage of family in areas has ruled over humanity, siphoning off the joy and labor of society for their own diamond back scratchers.
In the modern day, any form of help or assistance that could be used for the well-being of the people is instead commodotized and/or trivialized to maximize profits. Public spaces, works, and goods are all basically non-existent, so your reliance for community is based on local word of mouth or the internet, however an increasingly car dependent society limits the ability of people to have accessible common places to meet up. Social media companies have been taking increasing efforts in making their apps shittier which imo is a strategic move to deplatform minority voices who have been gaining social media presence.
I think for a while the internet was still untouched enough to be a nice escape, but it really feels like every aspect that was a nice reprieve or break from the rest of the world has been invaded.
The final, consumptive or "catabolic" phase of capitalism.
https://www.counterpunch.org/2018/11/01/catabolism-capitalisms-frightening-future/
The world is becoming globalized, and that is (and will continue to) spin the world into chaos, until everyone is treated equally
