The end of 0% interest rates: what it means for tech startups and the industry
newsletter.pragmaticengineer.com
newsletter.pragmaticengineer.com
> In 2020, the 10-year US treasury note yielded 0.5-0.7% per year. In 2023, it was between 4-5% – and 4%. These bonds pay interest every 6 months and return the principal amount invested in 10 years. Here’s how much money every $1,000 invested would yield:
And then he goes on to show that $1000 invested at a 4-5% interest rate would yield either $400 or $500 after 10 years.
But I thought that US treasuries, bonds and similar investments yield compound interest? Or was I mistaken all this time and it's been simple interest all along.
You get a coupon payment every 6 months for 10 years and you have to do something with that money. It can have a compounding effect if you aren't just spending it on beer and Cheetos. So for most people, the interest does compound - just not directly.
Nominal rates do not matter. Real rates matter.
Price of risk is not a function of nominal interest rate. It is something that is in excess of interest rate.
Increase or decrease in interest rate just translates coordinates by a constant amount. Laws of motion do not change.
If the interest rate is high, cash flows in the future have almost zero value today. So future is not really important. If the interest rate gets close to zero, future cash flows become relevant.
As an investor, I'll focus more on currently profitable investments in a high-interest-rate scenario and more on possible future profits (a.k.a. growth) in a low interest environment. To me, this is what it means for tech startups and the industry.
The rest of the article sounds very much like conventional wisdom about interest rate from any econ 101 class.
What I miss a little bit in such economic discussions is that people don't base their explanations in terms of consumption of real goods. All the economic activity, after all, has the goal to provide some consumable value to people (in that sense listening to music is also consumption of a real good).
I think inflation has gone up because we had suddenly higher demand and it took some time to expand supply (e.g., production of computer chips). As the current supply is not enough for all demand, some individuals need to wait. Interest is their compensation for waiting.
That's why I think low, zero, or even negative interest rates will be the future as production of goods is surpassing meaningful consumption. In that sense, the current interest rates are an anomaly.