Comment by jacquesm
7 hours ago
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.
Excellent points. You've perfectly described the brutal, interest-rate-driven VC cycle -- capital floods in, risk gets mispriced, and the market eventually corrects with Darwinian force. That's the "blunt instrument" in action.
Meanwhile in China, the approach is fundamentally different. Capital isn't just cheap; it's strategically directed by the state with goals beyond financial return. The aim is "new quality productive forces" -- slow-burn, systemic growth that reinforces social stability and industrial upgrade, not a boom-bust race for unicorns.
The current AI boom is our real-time experiment to see if this is the "better way." The U.S. model, as you note, is driven by massive private investment (over $109B in 2024) and is prone to hype cycles. China's model is state-planned, focusing on the "AI Plus" integration of technology across its industrial base, despite investing less ($9.3B) and facing constraints like advanced semiconductor access.
We're watching two competing logics: one seeking market-defining breakthroughs through volatile, capital-intensive competition, and another pursuing broad-based, stability-oriented technological integration. The results of this test will show which system better transforms capital into lasting, system-wide advantage.
Another factor is that dictatorships don't suffer from the push-pull effect of election cycles, especially magnified in a two party state. Such polarization wastes a lot of energy and thus is an impediment to progress. But of course there is that small price to pay.