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Comment by layer8 | Hacker News Reader

I don’t follow. Wouldn’t the future value (actual future benefit) of the product be independent of inflation, and when expressed in terms of eventual future pricing, simply increase with inflation?

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Inflation as long as it’s predictable doesn’t really matter, since the future cash flows just get bigger with more inflation. However real interest rates do affect the discount rate; higher interest rates relative to inflation discourage investment since you could just put the money in a bank instead of taking risk. That means inflation does have an effect, since higher inflation is historically more volatile which raises risk thus real interest rates. That’s all assuming a free market without government price fixing interest rates.

Nice explanation! It's the second order effects.

It's not just inflation; actual real interest rates are now the highest they've been in a decade[1]. This is how the fed works -- raise real rates until demand for goods drops. Today's real rate is still not particularly high, but at the margins a doubling of the cost should lead to some drop in activity, and in borrowing.

Look at a company like Apple[2], which has something like 100B in debt. After setting aside the 60B in cash, thats still 40B that they will eventually roll over into high cost debt, or unwind the business line that the debt fuels. Probably a mix of the two based on margin and risk.

But once you start cutting business lines, you cut revenue and that usually leads to lower share prices, since equity is basically priced on a 15-30 year forecast. Which I think is why patio11 says that all tech compensation plans are an option on interest rates or some such.

[1]: https://fred.stlouisfed.org/series/REAINTRATREARAT10Y [2]: https://finance.yahoo.com/quote/AAPL/key-statistics?p=AAPL

Future revenues are discounted to present value using a discount rate that increases as interest rates increase. This is called a discount cash flow model. Initiatively this makes sense because if a future dollar was the same as a today dollar you could just invest today's dollars in treasuries and have more in the future.

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