Was just trying to explain to someone why everything is going to shit, specifically companies, and realized, I don’t fully get it either.

I’ve got the following explanation. The sentences marked with “???” are were I’m lost. Anyone mind telling me, if they’re correct and if so, why?

The past few years, central banks were giving out interest rates of 0% or even negative percentages. Regular banks would not quite pass this on, but you could still loan money and give it back later with no real interest payments.

This lead to lots of people investing in companies. As long as those companies paid out more money than those low interest rates, it was worthwhile. But at the same time, this meant companies didn’t have to be profitable, because they could pay out investors from money that other investors gave them???

This has stopped being the case, as central banks are hiking interest rates again, to combat inflation???

  • @bstixEnglish
    1•11 months ago

    I’m not sure the explanation is true. It basically says that “lots of people” invested in Ponzi schemes. That’s usually not the case. Stock returns or dividends are based on the operating profits, not the balance from new investors. It would require that companies deliberately fake their financial statements, and while that probably happens, it’s definitely not the explanation for why “everything” went to shit overall.

    It’s true that the low interest has caused people who have money to place them in investments and that this may have overinflated the value of some companies, or that the money is placed in more risky companies.

    The second part is also true. Central banks are increasing the interest rates in an attempt to bring inflation down.

    Overall, the idea is right that inflation, interest and investments are tied together, but it doesn’t really explain why everything is going to shit.