Cory Doctorow (pluralistic.net) has a number of stories now on the concept of “enshittification”. Basically businesses start off being good to customers but eventually get to a point where, if they’re dominant the drive for endless profit results in them turning to squeezing suppliers, customers, everyone.

Tech enables new forms of exploitation.

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Most of these businesses operated at near unsustainable levels with almost negligible interest rates on loans, and now they’re panicking because their business model is shit and they’re trying to recover however they can by enshittifying everything.

Is capitalism dying or will it just get more and more ruthless until like 10 people have 99.999% of the wealth? Is there a difference? Either way it seems like humanity will have to make a choice soon whether we want to keep propping up a system that has fundamentally failed them.

Zero interest rates meant that speculative investing (for the purpose of selling later for more money, not for any dividends a company might pay from any profits) with lent money (aka leveraged investment) was pretty much a risk free proposition since loans with zeto interest rates cost no money to maintain. (You and me don’t have easy access to loans for investing from the money markets but the kind of investor we’re talking here does)

Interest rates go up and that lent money now has significant costs associated so investing with lent money (and nowadays that is most of investing done at professional levels) now has to produce enough returns to pay the interest on the loans hence all the pressure for companies to generate profits.

(Note that money from the money markets is typically on much shorter terms - and loans usually are rolled-over into new loans on maturity - than consumer loans, so interest rates on those respond much faster to changing base interest rates than for consumer loans)

(Also the companies themselves also have loans that they now need to pay interest on, which adds a more direct pressure to start having a positive cashflow)

As for central banks raising base interest rates to combat inflation, the idea is to literally make people have less money available (I kid you not: people are supposed to be made poorer) so that they don’t buy as much, and that reduction in Demand will cause prices to fall.

Edit: I was thinking about this and realised I had moved the ??? around but not clarified it all. Specifically, how do we go from “speculative investors having less cost-free money” to “companies which have eternally been in ‘investment phase’ (i.e. losing money whilst promising they’ll one day be the greatest thing since sliced bread) being forced into trying to actually have profits”. Well, for the stock price not to fall too much (which might lead to a rush-to-the-exits, a feeback-cycle were the more money that exits the less the worth of the stock, so the more money exits) and as speculative investors are fewer and/or have less money to invest, they have to appeal to more traditional investors, the kind that judges a company’s worth by their (stock-)Price-to-Earnings ratios (which, by the way, is a ratio that the smaller it is the more appealing a stock is to buy), so to have good P/E ratios without the Price side going down, the Earnings (basically Profit) side has to go up, hence the need to generate some profit (notice that the P/E of a company without profits is INFINITY), which is what pushed them to try and come up with profit NOW to hold their valuations and sometimes even at the cost of future profitability.

This also links with another element I forgot to mention early: the “climb up the yield scale”. In simple terms (as much as possible) - most of the money out there not in the hands of States is owned by two kinds of entities - Pension Funds and the Rich (which, given the extremelly uneven distribution of money actually own more money than everybody else combined) - and they’re not just putting it on a bank and getting Savings Account interest on it, they’re looking for ways to make money from money. Now, back in 2010 when Central Banks “rescued” the Economy through their Zero Interest Rates Policy, that money which was mainly parked in the safest of investments (Treasuries, Investment Grade Corporate Bonds) started getting puny amounts of interest, eventually even losing value (remember how the Treasuries of many countries started having a negative yield - i.e. you paid those countries money to hold your money?!) so they started going up into riskier and riskier asset classes seeking a higher yield (i.e. higher returns on their investments), up and up into Junk Bonds, Stocks, Realestate, Tech Stocks, Startups and even really exotic asset classes like digital “coins” (I very much doubt there would ever have been a Bitcoin mania without all that money seeking yield due to ZIRP), all of which is the “climb up the yield scale”.

Now the “climb up the yield scale” sounds like the opposite of what would make companies which are mainly speculative investments try to make profits because it is exactly that: the rise of baseline interest rates reverses that trend - it makes safe financial assets more appealing (holding Treasuries now actually pays interest, not cost interest, and just up the risk scale investment grade corporate bonds also pay more) which is pulling all that money down (remember, rich people and pension funds: they’re usually quite averse to losing money, i.e. more risk averse that, say, Investment Banks, especially old-wealth) and out from the higher-risk and more speculative investment classes, noteably Startups (and further down Tech Stocks and even Realestate). This again puts pressure on companies which were so far profitless to produce profits: it makes them look safer hence retain some of the investment which had before climbed the yield scale when the safest of investments had ridiculously low (even negative) returns.

There are actually yet more ways through which higher interest rates feed into speculative companies trying to put on a pretty face by actually having profits, but this post is more than long enough already ;)

It’s cyclical and it’s been happening for thousands of years. It’s part of our human nature.

We all work together and build systems, societies and civilizations and do great things. We become wealthy and then slowly concentrate that wealth to smaller and smaller groups of people. Eventually the majority of the wealth is controlled by a very small group of people and everyone else has nothing. The system at this point can not sustain itself and collapses. Then the whole human system restarts again from the bottom.

It’s happened many many times throughout human history.

We are just at the height of one of those cycles.

So just to answer the parts that didn’t make sense to you…

Basically, interest rates were so low that investors would throw huge sums of money at companies that might one day pay off huge (called moonshots. Basically, everyone wanted a piece of the next google.)

This was fine because with low interest rates, there weren’t secure guaranteed other investments those investors could be making.

But now, investors can, fairly safely, put their money into t bills (basically, lending it to government which is traditionally exceptionally safe) and get a decent return.

So investors are ready to pull their money out unless they see some sort of return. Hence, a site like reddit is now trying desperately to monetize so as to turn a profit or to go public, sell shares and reward the initial investors.

The central banks bit… Typically, the way to fight inflation is to slow the economy down by raising interest rates. When interest rates are high, it costs more to borrow so it’s harder to get capital to start a business, grow business etc which slows the economy and, in theory, slows inflation.

Happy to clarify!

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???

I’m not an economist, but this is how I understand it works. If interest rates are low and your company can deliver 2% returns to investors, more people will invest in your company rather than leaving their money in the bank. Your company can ALSO borrow money from banks at near-0 interest and deliver a 2% return on that borrowed money (I’m probably over-simplifying, here, but I hope not by too much…). Basically, after building and selling more of your product thanks to the borrowed money, your company will have enough to return the money they borrowed from the bank and then some. If interest rates are 5%, your company now needs to be much more profitable for the whole thing to work.

This is why I understand most companies (even big and solid ones) have what is considered a “healthy” amount of debt. As long as your company can earn enough to repay that debt and keep something, not taking that debt is considered a lost opportunity.

If you’re a start-up, though, you’re almost by definition not profitable to begin with. You need money in exchange for a promise of big future profits. Access to that money becomes a lot more challenging with higher interest rates, so you might not be able to operate at a loss for long enough to turn profitable.

EDIT: as I see a lot of discussion on speculation, stock market and such. While these elements do exist and magnify the effects of the higher interest rates, I think the basic mechanism can also be explained without them. Low interest rates are a way of pumping “free” money into the economy, when you stop doing it, the economy goes to shit in various ways. For instance:

You have no job but own a car. You plan to drive to the countryside, buy $100 worth of potatoes and resell them in the city for $110. You estimate that gas will costs you $4. You have only one problem, you don’t have $100. But hey, interest rates are super-low! You can borrow $100 from the bank and give them $101 back after selling your potatoes, so you’re good to go! In the end, you’re $5 richer, as you’ve spent $105 and earned $110.

WAY #1 things go to shit: if rates had been higher, you wouldn’t have even be able to start your business (low interest rates attract more new businesses to the market)

Now say you want to do this again. Your net worth is no longer 0, you have $5! Can you buy $5 worth of potatoes and go on without borrowing any more? Not worth it, you would barely be able to cover your gas costs. So, even if your business is overall profitable, you still rely on borrowing. Given your earlier success, if anything you will probably want to try borrowing more and go for $200 worth of potatoes this time! Note that in this example you started with an owned car; if you’d had to buy one, it would take you years to repay the car and start actually turning a profit.

WAY #2 things go to shit if rates get higher now, you will have to shut down your business. You will still have earned some money, but you can’t continue

Fast-forward a few years, your business is moving about $1M worth of potatoes You buy them for $1M and sell them for $1.05M, earning a cool $50K. From your years in the potato business, you have accumulated $200K in cash. Now, if you want to buy your $1M worth of potatoes, you still rely on the bank to lend you money. OR at this point, you could scale back your business and only use your cash reserves to buy potatoes. You would buy for $200K and make $10K every time. But rates are still so low and demand for potatoes is still very high, so why wouldn’t you borrow and make a $50K profit instead? Or, by borrowing $2M maybe you could buy a field and start growing your own potatoes (since the farmer started raising his prices).

WAY #3 things go to shit if rates get higher now, you might still have a sustainable business, but you will need to scale it back and probably cut some costs. Maybe not too shitty for you, but probably not great news for the people you’ve hired to help you (“guys, due to difficult market conditions, our business has now 5 times less profit and we have to downsize”)

And I haven’t even touched on how an unexpected event, let’s call it Schmovid, can leave you with $1M in potatoes that you’ve already paid but nobody can buy any longer. Your $200K savings have been wiped and now you’re $800K in debt with the bank. You’re starting to recover and… NOW the borrowing rates get much higher.

Companies are competing with each other to maximize profit. If there aren’t new markets for them to grow into, companies can only grow by reducing cost and bringing in more revenue. As such they make shittier products while also pushing prices as high as they can go. This is an unfortunate consequence of how capitalism works.

Worldwide economic growth is coming to a halt and what we’re seeing is the ripples it causes.

Because rich people want to make more money.

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???

It sounds like this got oversimplified. In finance there’s a thing called the Risk Free Rate. When the rate is at 10%, banks can make 10% without taking on risk. And when the rate is at 0%, they have to take on risk to make any money.

When the rate is at 0%, everyone is in stocks and corporate bonds. It’s higher risk than US treasuries and repo windows, but you aren’t making any money through those so you have to take on risk. Therefore everyone is pouring their money into the stock market when the RFF is 0%.

If the rate jumps from 0% to 10%, banks can make 10% without any of the downside risk of stocks. Not many stocks are an easy pick for 10%, and stocks need diversified. Money gets pulled out of stocks to go to safer investments.

The effect when it is at 0%, is that investors are throwing away their money and businesses can burn through it without turning a profit for years, if ever.

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

The Fed’s approach to combating inflation is to constrict the wealth of the working class. Employment and wages are key indicators. They are trying to push these numbers down to fight inflation. The economy was too hot. They are tempering it, using a macro shift of rising rates.

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???

Few, if any, of the big tech companies were playing out any kind of dividend to investors. It was more that they were content for companies to maybe someday make money as opposed to actually making money,

lemme tell you about a special gorilla from Cincinnati

Simple, the world already ended and we are feeling the slow burn.

Too many humans on the planet to be sustainable. People will start dying en masse in my lifetime, that’s just mother nature correcting things as she always has.

We were on borrowed time since humans discovered agriculture and the fun is over now.