What effects does the zero-interest and negative-interest policy of the central banks have on the willingness to take risks of private investors in venture capital and private equity firms, especially large investors who can afford high losses?
The declared goal of many venture capital firms is to promote future large companies (unicorns) that become marketable and can then be sold at multiples of the original purchase price. On the other hand, companies that cannot generate rapid sales growth are simply dropped and, in cases of doubt, declared bankrupt. In any case, no small and medium-sized companies are supported, which form the backbone of the German economy with their high job security.
Aren't these risks of companies with artifically inflated company values passed on to small investors via the international capital markets, the establishment of new corporations and their IPOs, so that the wealth distribution is concentrated even more on the owners of large fortunes?
Are we not talking about two different sorts of interest rates on different markets?
I am of the opinion that zero-rate interest policy is deleterious to the operation of stable financial markets because it distorts (or even eliminates) valid risk assessments. It encourages financial actors to operate on margin because borrowing costs are so low thus driving asset markets to sky-high valuations out of all proportion to the true values of the underlying assets.
Compound this effect with a plethora 'artificial' derivative instruments, the total of which nobody knows, but is estimated to be in the quadrillions, then we have investors picking up pennies in front of a steamroller. This writer, whom I follow and respect, describes our current dilemma well:
http://charleshughsmith.blogspot.com/2022/01/the-cult-of-speculation-is-cult-of-doom.html
I think the assumption of a greater willingness to take risks as a consequence of the policy of zero rates is correct. You are right about risks which passed on to small investors via the international capital markets. These risks are taken more easily by small investors because of the zero rate policy and central bank QE programs are constantly pushing up the stock markets (asset inflation). Therefore, in recent years, small investors have formed the illusion that the market always goes up and they are ready to take risk easily. Accordingly, it is easier to raise money from them for large venture capital companies or in other ways - through IPO's, SPAC and so on. And yes, wealth distribution is concentrated even more on the owners of large fortunes as a as a consequence of these mechanisms.
Central Banks zero and negative interest rate policy is problematic because it erases and even turns negative most financial institutions (banks) earnings. Another big problem of zero and negative interest rate policy is that it dangerously distords asset valuation which is artificially inflated. With zero or negative interest rate, the concept of risk takes a back seat as institutional investors borrow massively to finance projects regardless of the risks attached.
Dear Vyacheslav, Ako and Milan, many thanks for your answers and information!
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