> Suddenly, borrowing money in order to fork it over to shareholders makes less sense in a world of higher interest rates
What a lot of people probably dont realise when they read the term "business" is how big a fraction of management attention, incentives and remuneration is pure financial engineering: a parasitic game between financiers, accountants, tax code, central banks and company treasuries that has nothing to do with the mission of the company.
A modern corporation is a gigantic financial spreadsheet with its real assets a mere footnote.
In its most benign form debt is an accelerator for a healthy business that is growing. It is possible to get a debt hangover when misestimating actual business prospects and that is a serious enough challenge of its own.
The virtual reality of Wall Street and the obese financial system only serves to inflate the volatility. That is by design because volatility is precisely what it is milking.
>What a lot of people probably dont realise when they read the term "business" is how big a fraction of management attention, incentives and remuneration is pure financial engineering
an anecdote I've shared before, was talking to an acquaintance from my child's kindergarten who was an investment guy and I said I thought that finance services were increasingly capturing too much value and he countered that was because finance was where "all the innovation is."
He later got indicted for fraud and couldn't explain how a lot of money disappeared.
As a finance guy I don't see a lot of core innovation. Somehow I've been able to understand pretty much every financial instrument I've come across using a few basics that you learn immediately when you get into the business:
Time value of money, optionality, non-arbitrage.
There's a million ways to cook up a financial product from those and I'm not going to pretend I know them all, but it's like how a chef can look at a dish from another culture and still more or less describe what it is: sugar, fat, acidity, heat, etc.
When exciting things have happened in finance it's often been purely because the exciting thing became legal. Things like buybacks or the repeal of Glass-Steagal. The other thing that can happen is that some sales team finds a way to sell the thing that creates an ecosystem around it, like Credit Default Swaps. Rarely is it the financial contract itself that is so inventive as to create a market.
you anecdote is very apposite and imho applies beyond just the financial realm.
financial innovation is dirt cheap. get enough aligned interests around a table and you can create new contracts, new financial markets etc out of thin air. its all fundamentally just a game around information control, an intermediary forcefully interjected in the economy and extracting rents.
now, the quiz: in which other sector is most "innovation" dirt cheap and essentially just a game around information control, an intermediary forcefully interjected in the economy and extracting rents?
the only thing that could be worse than what we have today is when those two "innovative" sectors merge. yet this outcome is inevitable and it will happen fairly soon.
It may be true that at the top of any corporation is a lot of financial engineering and games. But at the bottom is the actual work, and when the leaders neglect the bottom is when the vultures swoop in to remind everyone.
There is a sick game in the world. The cause is not the workers, it’s the elites. However cold water washes away the crabs.
That actual work is in many cases just for keeping up appearances. The company owners and leadership know that the product or whatever their staff is working on is doomed to fail from the beginning, but need something to show to /with bankers and politicians to increase borrowing.
Just think about how many truly awful competitors there are in any market or product sector. If you noticed, don't you think they've noticed?
Both hands are required to clap, and frankly workers play their own games too. The vast majority of folks have no issues enabling terrible situations for a paycheck, and pretending to work isn’t exactly new either.
All money is created by banks issuing debt, so it makes complete sense that people want to be as close to the money tap as possible to siphon from it. The alternative is trying to build up a productive business in the extremely competitive and harsh free market, where you have to deliver to customers, who are free to choose. Who wants that hassle when you can just pretend being a business and keep on borrowing?
>so it makes complete sense that people want to be as close to the money tap as possible to siphon from it
This is known as the "Cantillon Effect"[0], and it also explains the concept of biflation[1]: if you're close to the money tap and there's a surge of money, you can profit from arbitrage before that money hits the larger economy and spreads out. The further away from the money tap you are, the less you're able to profit from changes in money supply. Everyone who isn't close to the money tap is on the losing end of this arbitrage opportunity.
This creates perverse incentives for large well-connected business entities, typically centered around schemes involving juggling debt.
>Who wants that hassle when you can just pretend being a business and keep on borrowing?
Yep.
Eventually every business model starts turning into some variation of a pump and dump scheme. We see this most prominently in crypto, but also in the traditional economy (stock buybacks, real estate speculation, startups running on VC fumes, etc.)
When enough of the economy turns away from production to speculation, the entire thing falls over and implodes. We don't know the exact point when this happens, and it's probably impossible to model, but history tells us it eventually does happen. People like Michael Burry believe this implosion is imminent, but things keep getting patched at the last second and the machine keeps lurching along.
Despite the fancy math and terminology, the stock market (and the larger financialized economy) is ultimately based on "vibes" and the vibes now are bad.
Even the 2008 crash didn't put a stop to these speculation games. Nobody knows how long "we" can keep this up. It's like a slot machine with a bomb inside. The rich guys pulling the lever are getting most of the coins, and the rest of us will get mostly blast damage.
> A modern corporation is a gigantic financial spreadsheet with its real assets a mere footnote.
This is the opposite of the reality. Financial statements following GAAP (USA) or IFRS (EU + many other major countries) explicitly list assets on the balance sheet with associated footnotes that explain more complex areas in greater depth. Often, footnotes will include more detailed information for those assets such as depreciation schedules (particularly for PP&E: Plants, Property, and Equipment).
A company can raise capital either via debt or equity financing[0]. Relevant footnotes usually include the terms of how capital was raised, which is normally to fund the core business operations for most companies I have come across.
> The virtual reality of Wall Street and the obese financial system only serves to inflate the volatility. That is by design because volatility is precisely what it is milking.
I agree there are indeed Wall Street firms that conduct unhealthy business, but I believe this is more common within Wall Street banks and investment firms rather than most American businesses as your comment seems to be implying.
I encourage you to read a set of financial statements to better understand how a business truly operates from an accounting perspective. Apple’s financial statements[1] are a good place to start since they have many PP&E assets, conduct financial services, and regularly deal with more complex accounting topics such as foreign currency conversion and derivatives for hedging. It’s truly valuable insight into how a company that’s incredibly expansive operates in (my opinion) a rather healthy manner all things considered.
This is my gut feeling about a lot of activity going on in modern corporations. Private equity firms, for example, have been historically blamed for a lot of once great engineering companies in the UK being combined into a bloated mess of activities - which ends up ultimately sacrificing competitiveness.
However I feel like your average voter shaking my fist angrily a bankers sometimes when trying to put it into words (I don't honestly have a lot of insight on how it all works).
Have you got any good book/essay recommendations on over-financialisation?
It's a necessary pain. Better for the bubble to gradually deflate and find a steady state than to keep expanding unchecked till we get to a repeat of 2008.
What a coincidence it will be a pain absorbed mostly by those working pay check to pay check and not the politicians and bankers with a legal moat of grifting off our agency.
How are politicians going to absorb an economic shrinkage? What percentage of total personal net worth is owned by federal politicians in the US? Maybe it's higher than I would have guessed, but there are only 537 federally elected offices and no federally elected billionaires.
I see some numbers thrown around that the total net worth of congress is $2-3 billion. That's only $9.00 per American at the upper end. Even a complete personal bankruptcy of all of them wouldn't have measurable economic effect on its own.
I'm an economics noob, but from a lay perspective, I do wonder how sustainable the American economic model is.
The debt is higher than the GDP. That's not really a problem as long as you can keep printing money and that money will be absorbed by other economies.
However, for the first time in over 200 years, we're reaching a point where the largest global economies are NOT western nations. While Japan and France and UK and other EU allies could be counted upon to keep buying your currency, can you be as dependant on India, China, Indonesia and Brazil?
What happens in 2050 when the amount of money needed to keep propping up the system keeps going up, yet the economies with the money and scale to absorb that extra money are not your allies?
US will print more money to pay for its debts. Inflation will cause US credits not to be a popular asset to buy, so debts naturally will reduce. US people will need to deal with higher inflation like the rest of the world does all the time.
Tax the people who are creditors and return some of the money to debtors, we could do this for all debts and sure it would be painful but life would go on. The current situation where the wealthy farm out their money to people and make over sized profits with extremely low risk has to be blunted at some point; the debts owed by the US government to the rich is do excessive at this point there has to be a plan to recover some of it. We must find a way to redistribute some of the rent seeking at some point or have society collapse as the rich acquire every last bit of wealth.
Eventually all wealth will end up with fewer and fewer people until the system completely collapses. Debt burden is just another instance of the rich making themselves even richer at the expense of working people - this year tax payers are expected to pay over $660bn to rich people in interest payments.
There needs to be some way of taxing the ultra rich effectively to be able start balancing the books. Every time this is discussed people start talking about high earners and never about the types of people lending the government hundreds of millions of dollars.
For example the average tax rate paid by the top 400 wealthiest people in the US was just 8.2% (2010-2018) and that is on additional income not the billions they already have. Let's not get started with Trusts handed down generationally to avoid inheritance tax completely.
"normal levels". Interest rates have been declining for almost eight centuries and now that population growth is no longer exponential, it is unreasonable to expect exponential compensation.
In fact, in the face of real physical laws like the constant thermodynamic increases in entropy, it would be foolish to expect to even get a zero nominal yield. Life is the gradient between our endowed energy reserves and the heat death of the universe. Something that violates this is akin to a perpetual motion machine.
You either get inflation, negative interest. Any pretense of permanent zero yield will require political redistribution of income from one part of the economy to another.
I don’t make any returns on that at all. I think a short sharp one off redistribution is better than endless austerity for the poor and socialism for the rich.
I’d love to hear some other proposals about how to pay our debts, I think interest payments for governments are set to surpass GDP or something. Seems like we need to find a way to tax back some of the money the super wealthy are lending to the government.
Honourable intentions, but you got it all wrong. What you want, or at least the consequence of what you want, is called hyperinflation. It's better to read what it is in Wikipedia than having savings in the country experiencing it. Good though, you're not leading the FED.
Aren’t the creditors that get screwed essentially the citizens of the countries? They pay money into huge pension programs that are pilfered with management fees and poorly structured investment portfolios. These citizens also, more importantly, backstop financial mayhem through funding of depository insurance programs (that apparently insure accounts beyond the insured amount … for arbitrary banks), direct bailouts to failed enterprises, and central banks that provide cheap money for the well-connected fat cats to disburse (or hold onto) as they wish.
The system in the US is essentially corrupt and engineered to support the status quo. It is far from a free market supported by savvy players making decisions based on actual risk/reward principles.
The amount of wealth being sucked from the labour of younger generations is beyond any ridicule. Extremely high taxes on labour - that goes to the old, extremely high real estate prices - to the old, extremely high rents - to the old. Yet it is not enough and they take on huge debts to the government - to be paid by the young. Top that with the forced pension fund contributions of young workers who are to expect to never receive any pension when they turn old.
I know this is a high earner tech forum, and these things don't become most readers, but for people working in other sectors the perspective is different.
> Pensioners comprise the biggest creditor in the world.
Are you sure you want to tax people who've worked all their lives, saving up money, who are now living off the interest payments?
Yeah, and I say that as someone on the wrong side of forty.
The relative growth in wealth from pensioners to working groups in most Western nations is completely unsustainable, and will end very badly eventually. Trying to flatten the curve now is preferable to the alternatives.
I wasn't aware that was a thing - how is equity a type of debt? They seem to differ in their core concepts. I'm not being snarky or anything - I'm genuinely curious about the reasoning!
Equity debt, I get that, it's like a home equity loan, or, well, a corporate bond, kinda.
Assuming that equity≅debt - which, respectfully, I'm not - isn't it comparing an unknown rate of depreciation + an unknown future commodities market versus a very known interest rate environment? The latter of which, circa 2018, there was nowhere to go but up, and everyone knew it. Depreciation . . aerospace, forecasting is crap even assuming it even exists; I'm lucky if they know what's on their own shelves. A lack of fundamental comprehension of what the word risk actually means . . eh, that's endemic, actually.
Something I've noticed when reading financial news lately is that having the interest rates so low for so long has raised an entire generation of people who no longer separate between having money and borrowing money. Carefully read news articles about recent businesses in trouble, and notice how casually the articles implicitly claim that the problem is solved by extending them more credit. Banks are in trouble because their assets became worth less have their problems solved by lending them more money, on time frames that can't even remotely bridge the problems. It's also subtly a theme in a lot of other text too, where borrowing is if not outright conflated with having money, certainly it's very close.
It's not the same, though. Not even in a ZIRP environment, and certainly not in a non-ZIRP environment.
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What a lot of people probably dont realise when they read the term "business" is how big a fraction of management attention, incentives and remuneration is pure financial engineering: a parasitic game between financiers, accountants, tax code, central banks and company treasuries that has nothing to do with the mission of the company.
A modern corporation is a gigantic financial spreadsheet with its real assets a mere footnote.
In its most benign form debt is an accelerator for a healthy business that is growing. It is possible to get a debt hangover when misestimating actual business prospects and that is a serious enough challenge of its own.
The virtual reality of Wall Street and the obese financial system only serves to inflate the volatility. That is by design because volatility is precisely what it is milking.
an anecdote I've shared before, was talking to an acquaintance from my child's kindergarten who was an investment guy and I said I thought that finance services were increasingly capturing too much value and he countered that was because finance was where "all the innovation is."
He later got indicted for fraud and couldn't explain how a lot of money disappeared.
Time value of money, optionality, non-arbitrage.
There's a million ways to cook up a financial product from those and I'm not going to pretend I know them all, but it's like how a chef can look at a dish from another culture and still more or less describe what it is: sugar, fat, acidity, heat, etc.
When exciting things have happened in finance it's often been purely because the exciting thing became legal. Things like buybacks or the repeal of Glass-Steagal. The other thing that can happen is that some sales team finds a way to sell the thing that creates an ecosystem around it, like Credit Default Swaps. Rarely is it the financial contract itself that is so inventive as to create a market.
financial innovation is dirt cheap. get enough aligned interests around a table and you can create new contracts, new financial markets etc out of thin air. its all fundamentally just a game around information control, an intermediary forcefully interjected in the economy and extracting rents.
now, the quiz: in which other sector is most "innovation" dirt cheap and essentially just a game around information control, an intermediary forcefully interjected in the economy and extracting rents?
the only thing that could be worse than what we have today is when those two "innovative" sectors merge. yet this outcome is inevitable and it will happen fairly soon.
There is a sick game in the world. The cause is not the workers, it’s the elites. However cold water washes away the crabs.
Just think about how many truly awful competitors there are in any market or product sector. If you noticed, don't you think they've noticed?
This is known as the "Cantillon Effect"[0], and it also explains the concept of biflation[1]: if you're close to the money tap and there's a surge of money, you can profit from arbitrage before that money hits the larger economy and spreads out. The further away from the money tap you are, the less you're able to profit from changes in money supply. Everyone who isn't close to the money tap is on the losing end of this arbitrage opportunity.
This creates perverse incentives for large well-connected business entities, typically centered around schemes involving juggling debt.
>Who wants that hassle when you can just pretend being a business and keep on borrowing?
Yep.
Eventually every business model starts turning into some variation of a pump and dump scheme. We see this most prominently in crypto, but also in the traditional economy (stock buybacks, real estate speculation, startups running on VC fumes, etc.)
When enough of the economy turns away from production to speculation, the entire thing falls over and implodes. We don't know the exact point when this happens, and it's probably impossible to model, but history tells us it eventually does happen. People like Michael Burry believe this implosion is imminent, but things keep getting patched at the last second and the machine keeps lurching along.
Despite the fancy math and terminology, the stock market (and the larger financialized economy) is ultimately based on "vibes" and the vibes now are bad.
Even the 2008 crash didn't put a stop to these speculation games. Nobody knows how long "we" can keep this up. It's like a slot machine with a bomb inside. The rich guys pulling the lever are getting most of the coins, and the rest of us will get mostly blast damage.
[0] https://en.wikipedia.org/wiki/Richard_Cantillon
[1] https://www.investopedia.com/terms/b/biflation.asp
This is the opposite of the reality. Financial statements following GAAP (USA) or IFRS (EU + many other major countries) explicitly list assets on the balance sheet with associated footnotes that explain more complex areas in greater depth. Often, footnotes will include more detailed information for those assets such as depreciation schedules (particularly for PP&E: Plants, Property, and Equipment).
A company can raise capital either via debt or equity financing[0]. Relevant footnotes usually include the terms of how capital was raised, which is normally to fund the core business operations for most companies I have come across.
> The virtual reality of Wall Street and the obese financial system only serves to inflate the volatility. That is by design because volatility is precisely what it is milking.
I agree there are indeed Wall Street firms that conduct unhealthy business, but I believe this is more common within Wall Street banks and investment firms rather than most American businesses as your comment seems to be implying.
I encourage you to read a set of financial statements to better understand how a business truly operates from an accounting perspective. Apple’s financial statements[1] are a good place to start since they have many PP&E assets, conduct financial services, and regularly deal with more complex accounting topics such as foreign currency conversion and derivatives for hedging. It’s truly valuable insight into how a company that’s incredibly expansive operates in (my opinion) a rather healthy manner all things considered.
[0] https://www.investopedia.com/ask/answers/032515/what-are-dif...
[1] https://s2.q4cdn.com/470004039/files/doc_financials/2022/q4/...
However I feel like your average voter shaking my fist angrily a bankers sometimes when trying to put it into words (I don't honestly have a lot of insight on how it all works).
Have you got any good book/essay recommendations on over-financialisation?
Dead Comment
I see some numbers thrown around that the total net worth of congress is $2-3 billion. That's only $9.00 per American at the upper end. Even a complete personal bankruptcy of all of them wouldn't have measurable economic effect on its own.
The debt is higher than the GDP. That's not really a problem as long as you can keep printing money and that money will be absorbed by other economies.
However, for the first time in over 200 years, we're reaching a point where the largest global economies are NOT western nations. While Japan and France and UK and other EU allies could be counted upon to keep buying your currency, can you be as dependant on India, China, Indonesia and Brazil?
What happens in 2050 when the amount of money needed to keep propping up the system keeps going up, yet the economies with the money and scale to absorb that extra money are not your allies?
My mortgage is higher than my annual income
Unlike me a country doesn’t have an end of income date in sight either - it doesn’t retire.
The "% of GDP" measure of debt is misleading. Nothing special happens or "runs out" at 100%.
A better way to say "150% of GDP" here is "18 months of GDP".
Now you want to give them another handout, the first time interest rates get to almost normal levels?
There needs to be some way of taxing the ultra rich effectively to be able start balancing the books. Every time this is discussed people start talking about high earners and never about the types of people lending the government hundreds of millions of dollars.
For example the average tax rate paid by the top 400 wealthiest people in the US was just 8.2% (2010-2018) and that is on additional income not the billions they already have. Let's not get started with Trusts handed down generationally to avoid inheritance tax completely.
In fact, in the face of real physical laws like the constant thermodynamic increases in entropy, it would be foolish to expect to even get a zero nominal yield. Life is the gradient between our endowed energy reserves and the heat death of the universe. Something that violates this is akin to a perpetual motion machine.
You either get inflation, negative interest. Any pretense of permanent zero yield will require political redistribution of income from one part of the economy to another.
Taxing even as much as 5% of that per year would be $200, peanuts compared with tax on earned income from doing useful work
I’d love to hear some other proposals about how to pay our debts, I think interest payments for governments are set to surpass GDP or something. Seems like we need to find a way to tax back some of the money the super wealthy are lending to the government.
The system in the US is essentially corrupt and engineered to support the status quo. It is far from a free market supported by savvy players making decisions based on actual risk/reward principles.
Are you sure you want to tax people who've worked all their lives, saving up money, who are now living off the interest payments?
The amount of wealth being sucked from the labour of younger generations is beyond any ridicule. Extremely high taxes on labour - that goes to the old, extremely high real estate prices - to the old, extremely high rents - to the old. Yet it is not enough and they take on huge debts to the government - to be paid by the young. Top that with the forced pension fund contributions of young workers who are to expect to never receive any pension when they turn old.
I know this is a high earner tech forum, and these things don't become most readers, but for people working in other sectors the perspective is different.
Yeah, and I say that as someone on the wrong side of forty.
The relative growth in wealth from pensioners to working groups in most Western nations is completely unsustainable, and will end very badly eventually. Trying to flatten the curve now is preferable to the alternatives.
And people who over-borrowed will get free money but people who didn't (and saved instead, and put up with 0.5% rates) will be punished?
Particularly in low margin, high capital industries like aerospace.
Equity debt, I get that, it's like a home equity loan, or, well, a corporate bond, kinda.
Assuming that equity≅debt - which, respectfully, I'm not - isn't it comparing an unknown rate of depreciation + an unknown future commodities market versus a very known interest rate environment? The latter of which, circa 2018, there was nowhere to go but up, and everyone knew it. Depreciation . . aerospace, forecasting is crap even assuming it even exists; I'm lucky if they know what's on their own shelves. A lack of fundamental comprehension of what the word risk actually means . . eh, that's endemic, actually.
It's not the same, though. Not even in a ZIRP environment, and certainly not in a non-ZIRP environment.
Dead Comment