Low interest rates: who benefits?

1/

People like to rant about financial repression, but I haven't seen many walk out an understanding of *why* we're doing this.

Like - if it's so terrible, how come we keep doing more of it?

Let's look at who it's good for, and who it's not.
2/

First: who it's not.

It's not good for **new entrants** - this applies to both the individual and to businesses.

Let's look at an example of each to understand why newer players are disadvantaged.

First, the individual.
3/

Imagine you're a broke ass millennial (you know, hypothetically). Do you want to enter adulthood in a high-rate environment or a low-rate environment?

High rate, for sure.

Because in a high rate environment, assets are cheaper.

Why?
4/

Simplistically: if you're paying 15% on a mortgage you simply can't afford as much house due to the monthlyl payments.

If *everyone* is paying 15%, this drives housing prices generally south because people can't afford to pay as much.

Also: all other assets too.
5/

Now let's talk about businesses.

Once upon a time I was the CEO of a tiny company, and we took some debt. The debt was at an insane interest rate (15% or something) because it was unsecured.

And you know what? It felt like free money.
6/

It felt like free money because, as a small business, we were growing revenue at 300% per year. Paying a 15% vig on that is just... I mean it's a rounding error.

Small companies (that don't fail) grow faster than big companies, so high interest rates help them compete.
7/

And what to *low* interest rates do? Well, the inverse: they allow large companies with tons of collateral to borrow a lot of money.

What do they do with this money? Oftentimes they buy small companies who might become their competitors.

And they pay insane prices.
8/

The acquisition paid on multiples can be really wild, and yet it still makes sense for acquirers to pay since they borrow money for almost nothing.

This is why the dominant, all-consuming megacaps: small, scrappy companies have little advantage in a low rate environment.
9/

So what does a low-rate environment do?

It advantages incumbents over new entrants. It does this in multiple ways: first, by removing the advantage that small companies get from being nimble and more efficient with capital.
10/

And second, by keeping asset prices high which means that incumbents (who have lots of assets) have massive borrowing power since the value of their collateral (which they borrow against) stays high.
11/

So why not just say "screw the olds" and let rates rip?

Well we could, for sure, but it'd be quite messy. Right now we have a *lot* of incumbents.

Chances are you probably work for one (not you, keyboard samurai, this is a numbers game).

So your job would be in jeopardy.
12/

And if not your job, the jobs of a lot of people you know.

Oh - and your parents? They're incumbents too. And their strategy for taking care of themselves for the remainder of their lives relies, in essence, on a low rate environment.

So: you gonna carry them?
13/

Also remember that one of the Fed's mandates is high employment.

By keeping rates low, they are arguably doing their job as currently framed.

If we want them to have a different mandate, we should perhaps tell them that.
14/

And this is also why everyone feels like it's so hard to get ahead: because it fucking is.

Low rates are a nightmare for new entrants at many levels, not just the 2 examples above.

It's very hard to be starting out in this economy.

But that ain't inflation you're feeling.
/15