Asklemmy

Very generally, you use the central bank rate to control the money supply. You increase it to remove money from the economy.

Even money is affected by supply and demand. Too much money in the economy is one of several things that can cause inflation -- for example because a surplus of money means people value money less and goods/services more. As a result, the value of goods/services as measured in money goes up.

Sadly, these are macro-level problems. Personally having a surplus of money sounds great, but the actual amount of extra money I made during Covid was not that much -- but give that much money to 100 million people and you're going to have inflation (I live in Vietnam where the economy was not seriously impacted).

There was a global supply chain shortage due to COVID. This meant that the demand for everything backed-up. This was compounded by people having more time at home and potentially more money to repurpose from services to goods, so the shift also drove up demand. When there is more demand for goods than the amount available, the cost of goods sold goes way up until you reach a threshold where people are forced to buy less or go broke. This is the elasticity of demand. Their is a point where certain goods are no longer appealing in price or affordable in general. It’s really bad when these are mandatory commodities like food.

This runaway inflation is always dealt with in the same way. The central bank raises interest rates for their notes/loans that they make with the banks across the country. This makes consumer and business loan interest rates rise, which makes them less appealing and also staves free cash flow, so people have less money to spend from loans, but potentially their salaries might be affected as well. This has the benefit of forcefully lowering demand. Whenever demand goes down, the cost of goods will start to go down. During the lull of demand, the supply chain can catch up as well. This is not the first time interest rates were raised to fix runaway inflation. Over time, interest rates will go back down again. It is cyclical.

One difference though is that the government is also in a cycle of under-regulating and over-regulating business. At the moment, we were promised more monopoly-busting and cracking-down on driving up prices in a collusive manner to fight the fed’s deflationary tactics and attempt to make windfall profits. Meaning, whole industries are not supposed to band together behind closed doors and agree to not lower their prices. That is called collusion and is supposed to be illegal. As long as that keeps happening, interest rates will keep getting hiked. The current administration seems to have more of a tolerance for this than they should. If things are going to shit, it’s due to this type of corporate cronyism with the government.

Additionally, you have outside actors like China who are buying up land and businesses and contributing to the turmoil in clever ways like making housing and food less affordable.

Source: Am MBA.

Because you're online way too much

Race to the bottom.

Your post is obviously mainly about interest rates, which wasn't clear from the headline. Why do you think higher interest rates equal "everything going to shit"?

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???

There's a bit of this, but it's not the main way everything ever worked.

The hiking interest was to combat inflation by discouraging people from borrowing and spending, but the reduction in spending can also push some companies out of business and start a recession. The economy isn't booming but we don't have a global recession yet either, so I'm not sure I'd even say they're "going to shit".

I'll keep it short : Greed

Planet Money has a lot of good podcasts about this.

If you’re curious about the problems that surrounded low interest rates, this is a good one.

https://www.npr.org/2023/04/14/1170103587/interest-rates-mortgage-summers-blanchard

Because 2013 happened. And 2013 was bullshit. I'm sure Adobe Creative Cloud, iOS 7 and the Xbox One would gladly explain that to you. Oh, and I forgot Vine. I mean, it was really good, but it basically led to Musical.ly, which led to TikTok. YouTube also got rid of the customisable channel page, instead giving us a simple banner instead (I said instead 3 times now). And did I mention fingerprint scanners on phones? I'm sure you all remember Facebook Home. You don't? Well, you're better off not remembering it. Also, they killed Brian Griffin only to ressurect him from the dead all of a sudden. And finally, Office 2013. There's nothing wrong with it, it just looked like garbage.

All of this led to the dystopian lifestyle we're currently living in.

What do you mean by “everything?”

Different entities rely on each other too much, so when a number of them have gone down, it began to drag the rest down, like a human tower that could no longer hold itself up. It doesn't help people think nothing needs to change about their economy, like maybe add a few rules on how it works, no reform needed. But no, apparently it's perfect.

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.