Asklemmy

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.

Is capitalism dying or will it just get more and more ruthless until like 10 people have 99.999% of the wealth? Is there a difference? Either way it seems like humanity will have to make a choice soon whether we want to keep propping up a system that has fundamentally failed them.

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.

Most of these businesses operated at near unsustainable levels with almost negligible interest rates on loans, and now they're panicking because their business model is shit and they're trying to recover however they can by enshittifying everything.

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 ;)

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 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.

Everyone giving you simple one-word explenation is most probably wrong.

Worldwide economic growth is coming to a halt and what we're seeing is the ripples it causes.

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.

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,

Most bizarre financial decisions can be put down to greed, or stupidity. Usually both.

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.

Because rich people want to make more money.

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.

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).

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.

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.

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.