December 10, 2023
NPR Weekend Edition recently recorded a podcast with Mark Williams, Master Lecturer of Finance, discussing Spotify’s third round of layoffs caused by higher borrowing costs and what the future might hold for high-tech companies.
Numerous high-tech companies borrowed when interest rates were low and used this money to grow their businesses through hiring, advertising, and R&D. Now many of these companies are in a similar position to Spotify. As Williams points out, high-tech is all about growth, to support this business model requires a lot of borrowing and spending. A rise in interest rates makes borrowing more expensive. As a result, this strategy becomes risky. “In 2021, it didn’t seem so because rates were at ultra-low levels, 50-year lows not seen since JFK was president. So they just loaded up on debt. It was really cheap debt – almost at zero interest rates. Within 18 months, by 2023, rates had skyrocketed. The Fed increased rates 11 times to now ultra-highs not seen since, well, 22 years ago. So they’re in a pickle,” Williams added.
According to forecasters and analysts, higher interest rates are here to stay. Consequently, this could halt the creation of new jobs due to a slowdown in the creation of start-ups, which are essential to job creation.
