[murgindrag]

Imagine you're a business with 5 million dollars in revolving debt, at a 2% interest rate. You have $100k in debt service costs.

If interest rates go up to 5%, you have $250k in service costs. Most businesses operate close to break-even (in efficient markets), and many will immediately go under. If businesses go under, that triggers a recession cycle: Those businesses lay off employees, who stop buying, driving down revenue for everyone else. People anticipating layoffs/furloughs/etc. stop buying. Hiring goes down too, since businesses start planning for rough times.

People buying on credit (anyone with a credit card debt) also find purchasing much more expensive, together with higher bills on existing debt.

A whole bunch of business opportunities also disappear in a poof of smoke. If a business has even a 1% expected real return, and interest rates are zero, it makes sense to borrow money to start that business (especially if inflation is also high, giving effective negative interest rates). If a business has an expected 1% return and interest rates are 12%, then I'm bleeding money. For these kinds of opportunities, think less SV startup, and more just normal businesses (e.g. I buy something and sell it a month or two later).

All of this piles on to form a recession.

[hammock]

So commercial debt is mostly variable not fixed rate?

[Ekaros]

My understanding bonds are mostly fixed rate. Their price on market can vary though. But unlike let's say mortages they are more often refinanced. And when that happens the rates can change.

[cannabis_sam]

> Most businesses operate close to break-even (in efficient markets), and many will immediately go under.

Then they are not managing risk properly and actually need to go under.

[ac29]

I'm not even sure that its true to a meaningful degree - at least in the US, large businesses dominate economically and are quite profitable (much better than "break even"). Microsoft, Berkshire Hathaway, JP Morgan - they are not going to "go under" if interest rates go up 0.25%, even though they all use corporate debt.