Higher US Fed interest rates will hit startups over the head The US Federal Reserve’s decision in December to increase the target range for the interest rate it pays banks by one-quarter of one per cent, to 0.25-0.5 per cent, didn't seem like an Earth-shaking event at the time. But it was the first time the world’s most powerful central bank had changed its rate target since 2008, and …
Not sure what the point of this post is. The Fed's rate rise just put a floor under the price of money. This has less of an impact on investment (money isn't moving from start-ups to government bonds) than it does on debt. Since 2008 central banks have engaged on huge policies of financial repression combing both low interest rates with money-printing to privilege debt. It was this which helped maintain and then pump up asset prices without any associated economic growth (this was supposed to come from the wealth effect that asset inflation is supposed to bring).
The current market uncertainties have little or nothing to do with interest rates but the resurgence of "risk-off" strategies moving hot money from one economy (China, Brazil, Russia) to another (US, Euro) with an associated correction of some asset values. Cue howls from the finance industry. I wouldn't mind so much about that if it didn't mean that central banks trying more of the same (driving interest rates negative such as in Sweden and Japan): in a risk-off environment this can only drive more money into "safer" bets such as US treasuries, or pushing string as the head of one bank put it.
So, the problem for start-ups isn't necessarily that there is less VC cash around but that the exit strategies are less lucrative: IPO or buyout. Not to worry, however, the financial industry will continue to lobby for the public to take on more of the risk (eg. by accepting bonds as collateral) so that valuations can be more or less maintained until that all-important IPO or sale.
The US did three cycles of QE, but after the conclusion of QE2 the Fed adopted a policy of allowing the bonds they held to mature without replacement, and continued this even during QE3. So over time as the bonds they hold mature they are effectively undoing that money printing - but at a slower pace than it was "printed" so it will take 7-8 more years for the Fed's holdings to reach pre-2008 levels.
They also purchased mortgage backed securities as part of QE3, which Fannie and Freddie would have otherwise ended up holding, so while this technically counts as monetary expansion had they not purchased them Fannie or Freddie would have ended up holding them so they're just in a different place on the government's books. Likewise these holdings decrease over time as the WAL decreases via principal paydown or payoffs resulting from sale/refinancing. But that's really just transferring them off the Fed's books as the ones that are paid off via sale or refinancing will mostly end up on Fannie/Freddie's books[*]
[*] Fannie/Freddie are making a lot of money for the US government these days, and are primarily responsible for the fact that TARP turned out to be profitable for the US government - over $65 billion in profit so far and continuing to increase - which is probably why even republicans who are loathe to have the US government involved in the private mortgage market have done little to re-privatize them since it would make our deficit bigger!
If the crisis in Asia deepens then the rise may well be reversed pretty soon.
If you raise/borrow money and assume that rates will stay this low forever then you need your head examined. If you do your business plan and cater for them to be say 3% then anything less is a bonus and 'embiggens' the bottom line.
anyone investing in a company that has not done a business plan with this sort of scenario also need their head examining.
Pah. Fail.
If you raise/borrow money and assume that rates will stay this low forever then you need your head examined.
Except that "new normal" is trying to make cheap debt forever true. The long term problems of this are disastrous: pretty much all insurance-based products (pensions, health insurance) will no longer work. But, hey, who cares as long as we hit our targets for the quarter or year?
I agree except I in this case it isn't just about hitting targets for the quarter. The FED is propping up the entire economy.
I wasn't a big fan of TARP when it was proposed. But it at least addressed the root problem: all that bad MSB debt. But a funny thing happened on the way to implementing it. Instead of actually buying the MSB debt, it got diverted elsewhere and the MSB debt was left in the system. So the castor oil flavored ipecac we were all forced to take didn't even address the issue it was supposed to address.
Yep, not a good place at all.
There has been some discussion in the Fed about whether they would have the option of setting a negative federal funds rate (the rate that is quoted as the Fed's "interest rate") A couple other countries have successfully done this so rather than being theoretical it is something they could actually consider. The idea is that by charging banks for the privilege of parking their excess reserves at the Fed it will encourage lending.
I'm not sure how much charging them 0.25% (for example) versus paying them only 0.25% affects the lend/no lend decision, but I suppose it could mean even easier money for rich VCs to borrow and bid up the valuation of so-called unicorns...so if nothing else I'm sure the scumbag running Uber would like it.
Hopefully the worst effects of the economic slowdown in China don't pass to the US and we avoid recession, and this isn't necessary. Since employment growth has continued to be relatively strong in the US even despite the layoffs induced by the oil price crash, and wage growth has recently strengthened, I don't think the US will tip into recession. It isn't like the US economy was ever growing strongly enough to get overheated, so barring some major 2008 style shock I think we'll muddle through and not see rates lowered, and instead see the regular 0.25% increases that had been assumed for 2016 simply delayed.
A couple other countries have successfully done this (negative interest rates) so rather than being theoretical it is something they could actually consider
Define success? Sweden and Switzerland have done it to push the exchange rate down; Japan is just going into it despite failing to get the economy growing with all other forms of expansive monetary policy.
Negative and near-zero rates have extremely deleterious effects on any form of saving. And, as we're seeing, they encourage the dependency on the Greenspan put: that central banks will always intervene to support asset prices.
The US is fine: capital is flowing back in from overseas and it has low energy costs. Of course, the next government shutdown won't be far away. But there are the slight problems of entitlement and pension funding…
While your analysis isn't bad, it skips the elephant in the room that the FED and other interest setting orgs DON'T want us to talk about.
The whole theoretical reason we went on this bender was they were worried about us going into a deflationary period. Is there anything more deflationary than having to pay some negative interest rate on top of all the other banking fees?
If you raise/borrow money and assume that rates will stay this low forever then you need your head examined. If you do your business plan and cater for them to be say 3% then anything less is a bonus and 'embiggens' the bottom line.
This OUGHT to be true. I'm not sure that it is. The FED has ironically fallen into a money trap. With economies depending on 0% (or lower) interest rates, when they try to bump them they kill economic growth. This is NOT a good place to be. When the next inevitable bust happens (and I wouldn't in any sense claim we've had a boom in the interim) they don't have any tools left in the tool box. And with governments around the world embarrassing drunken sailors with their profligate spending, they don't have any tools either.
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