Pretty much title. I've seen this talked about a lot but I only very vaguely know what all this means, could someone elaborate on what happened, why it happened and what the consequences of it are?
Pretty much title. I've seen this talked about a lot but I only very vaguely know what all this means, could someone elaborate on what happened, why it happened and what the consequences of it are?
Plenty of answers that explain it, but I still thought of a sick ass metaphor. Imagine two farmers, one of them inherits a set of rusty old tools. They till the land and they manage to make 100 potatoes in the season off the sweat of their brow. The second farmer takes a $1,000,000 dollar loan. They get a massive patch of land, people to till it, an irrigation system, etc. and manages to make 1,000,000,000 potatoes. They then pay off the million dollar loan and has 500,000,000 potatoes left over in the same amount of time (they often skip paying off the loan). The second farmer then takes out another loan, but this time they demonstrate their business model and that way they command a much bigger loan of $1,000,000,000 instead. The speed at which you can grow your company depends on how much money you can borrow. Getting a loan simply means that you can produce shit much faster to the point of economic relevance.
If you keep doing this and you have finite resources, you end up with problems. Both you as the farmer and an engineer need copper tubing: you for your irrigation and the engineer for their hadron collider. As a result, paintball guns end up costing $50,000 a pop because they require copper tubing of which there just isn't enough to go around. Therefore all the dudes who rock at your office start leaving to go work for a farm which commands higher wages so they can get paintball guns. Suddenly the offices are suffering and we need office workers and basically shit's out of whack.
Therefore, the government and not really the government (the fed) go "you need to chill out, we're not loaning money this easily anymore." So the terms on these million and billion dollar loans go from like 7% yearly interest to like 7.5% and it means that the calculus for businesses no longer works. The second farmer who ended up making 1,000,000,000,000 potatoes a year suddenly needs to lay off 80% of their workforce who were getting big salaries due to the cheap money. Only if you're really, really sure that you have a good opportunity do you seek a business loan during a rate hike. So then people go back to their offices and only the sick ass innovations actually follow through instead of the explosion of volatile ideas trying and failing.
Communism will win