Proven businesses can always borrow at fairly low rates. When capital gets really cheap it starts to incentivize greater amounts of risk taking because investors actually want risk.

If you are starting a dry cleaning business, you have a cost of the equipment, rent and other well known factors. Starting a tech company in a new and unproven area has different expenses and a different risk/reward profile.

Malinvestment can come in a lot of flavors. Cheap capital will result in too many dry cleaners and also too many startups that probably shouldn't have gotten funding.

The downside comes in various forms. 1) existing dry cleaning businesses are less profitable because of increased competition, and 2) startups hire scarce engineers and drive up wages, which drive up costs for everyone.

Cheap capital is justified bc the goal is growth, but it is a blunt instrument that creates hot spots and neglected areas simultaneously. Compare the approach used in the US with the approach taken by China. Chinese firms face significantly more competition than firms in the capitalist US, but overall China's policies are crafted with a more deliberate eye toward their distributional consequences and notions of the greater good are much more subject to sharp critique and pressure across social and industrial strata.

What we are seeing in the US is that policymakers have come to believe that the growth-focused approach is an escape hatch that can be used to reduce the effects of other bad decisions, but at some point the size of the inflated economy gets big enough that it takes on a political life of its own -- post-911 defense contractors have dramatically more lobbying and policy-influencing power than they had prior. Today, systemically risky financial industry participants have significantly more political clout than they had before the 2008 correction.

In other words, the fabric of (political) reality shifts and it becomes hard to identify what normal would look like or feel like. In my view, AI adds fuel to the existing fire -- it rapidly shifts demand away from software engineers and onto strategists -- give the team a strategy and now with AI the team will have it done in a few weeks. If not, a competitor will do it without poaching anyone from your team.

And market forces include both creative and destructive forces. Firm failure is a feature, not a bug.

Cheap venture capital is uniquely driven by the interest rate more than any other factor. Low interest rates drive money away from safer vehicles towards more risky vehicles because they still offer a return. This is good far people starting companies, but in the long run the decision makers on those investments almost always turn out to have mis-priced the risk factor and end up with negative returns.

This then causes the market to dry up again and if the interest rate hasn't dropped even further then a lot of companies that need follow up investment will now get killed off. It's a very Darwinian landscape that results from this and I've been wondering for years if there isn't a better way to do this.