Friday , January 28 2022
Home / Project Syndicate / Capital Is Not a Strategy

Capital Is Not a Strategy

Summary:
After years of central banks keeping interest rates low and pumping liquidity into financial markets, asset valuations are at historic highs. While entrepreneurs and venture-capital founders tell themselves that "capital is a strategy," bubble finance is no substitute for a business plan that can achieve positive cash flow. CAMBRIDGE – Along with the rest of the world, entrepreneurs have spent the past dozen years living in an unprecedented financial environment. Responding first to the stubbornly slow recovery from the 2008 financial crisis, and then to the recession caused by COVID-19, major central banks have sustained an array of unconventional initiatives and asset-purchase programs collectively known as

Topics:
William H. Janeway considers the following as important:

This could be interesting, too:

(Luke Froeb) writes Can ESG investing stop climate change without sacrificing returns?

Scott Sumner writes A disappointing Powell press conference

Scott Sumner writes What does it mean to say that something is inflationary? (part 2)

Scott Sumner writes What does it mean to say that something is inflationary?

After years of central banks keeping interest rates low and pumping liquidity into financial markets, asset valuations are at historic highs. While entrepreneurs and venture-capital founders tell themselves that "capital is a strategy," bubble finance is no substitute for a business plan that can achieve positive cash flow.

CAMBRIDGE – Along with the rest of the world, entrepreneurs have spent the past dozen years living in an unprecedented financial environment. Responding first to the stubbornly slow recovery from the 2008 financial crisis, and then to the recession caused by COVID-19, major central banks have sustained an array of unconventional initiatives and asset-purchase programs collectively known as “quantitative easing” (QE).

The direct result has been a massive accumulation of financial reserves in central banks and throughout the financial system, and a reduction of nominal interest rates on risk-free financial assets to levels below the rate of inflation. Interest rates are thus negative in real terms (and even in nominal terms, in some cases).

Years of unconventional monetary policies have also had a secondary effect on investment behavior. Under the conditions that central banks have created, investors (both institutional and retail) have become increasingly aggressive in their pursuit of positive real returns. Not only have they accepted increased levels of fundamental risk (that is, the risk of business failures wiping out the value of their securities); they also have become increasingly willing to accept illiquidity, buying securities that they cannot freely resell.

One dramatic example of this phenomenon is the flood of “nontraditional capital” – the National Venture Capital Association’s term for mutual funds, hedge funds, sovereign wealth funds, and so forth – into venture-backed private companies at historically high valuations. Others are the bubbles in crypto assets and the (often fleeting) explosion of “meme” stocks, driven by Reddit communities and retail investors on apps like Robinhood.

Finally, the apparently limitless supply of low-cost...

Leave a Reply

Your email address will not be published. Required fields are marked *