A title to Forbes.com last week indicated an increase in layoffs at Silicon Valley start-ups that predict a quiet summer for venture capitalists. On the same day, an A1 story in the the wall street journal reported that “high-flying startups have been anchored, quickly, by the new climate: layoffs, skeptical investors, an exodus of funds, and the prospect of a valuation discount.”
Such is life in relentlessly capitalist Northern California. Although California’s business climate is referred to as “socialist” by proponents who really should know better, the reality is that capitalism is practiced in California in a ruthless way. As is known, somewhere in the 90% range of startups fail, and as evidenced by the report of the Logthey are quickly put on the leash by their investors as their short- and long-term outlook begins to cloud.
The scary thing about all of this is that Silicon Valley is the most successful economic sector of the economy of the most successful country in the world. If Valley businesses are in trouble, it will be felt in the United States and, realistically, around the world. Tech companies alone are powerfully improving overall business productivity, not to mention the amount of economic activity in the United States (and the world) fueled by what’s happening in Northern California.
With all of the above in mind, should the Federal Reserve intervene? Should he cut interest rates or increase the so-called “money supply” to boost the morale of “skeptical investors” while reversing the “exodus of funds” signaled by the Log? Try to be serious. If you’re ever looking for evidence that the power of the Fed is exponentially more mythical than real, look to Silicon Valley.
On the one hand, global market forces would powerfully overwhelm any central bank efforts to reverse the outflow of funds. And it wouldn’t even be a contest. The meager amounts of credit or “money supply” the Fed would provide Valley banks would be eclipsed by investors feverishly reducing their exposure.
But wait, some will say. The Fed can go to zero! It can make credit free, don’t you know? Except the Fed can’t do that. Itself a producer of non-credit, the Fed cannot decree for free what it does not produce.
Better yet, the surest sign that the Fed’s zero-rate fantasies have no real-world relevance is the corporate and startup culture in Silicon Valley. Think about it. If the Fed can decree no credit as the simple folk among us regularly claim, why do valley startups routinely give away large stakes to venture capitalists in exchange for cash? Rather than giving up their equity, wouldn’t they get into debt for free? They sure would like to, but there really isn’t a debt market for companies that fail more than 90% of the time.
The fact that there is no debt financing in Silicon Valley is the surest signal to those interested in reality rather than fantasy that the power of the Fed to influence many stuff is the stuff of ignorant academic theorists, as opposed to something to seriously consider. No doubt economists agree with the importance of the Fed. Why wouldn’t they? The Fed employs more economists than any entity on earth. There is no doubt that journalists embrace the Fed as the almighty planner of economic outcomes. Why wouldn’t they? That’s what the economists tell them.
The good news is that reason eventually encroaches on the fabulist thinking of the overeducated and gullible. Real market forces always, always, still have their say. Prosperity cannot be imposed by law or forced, insofar as it is a consequence of the free movement of capital. And unless capital can get out of risky situations (think back to the failure rate in Silicon Valley), it can’t get in there in the first place.
Which means the Fed can operate as a full-service act for economists who couldn’t operate in any kind of real-world setting, as well as economic journalists who exist to promote central bank mythology. The rest of us can look away. No amount of tinkering by the Fed will deter an investment exodus from the valley, nor can the same central bank prevent an inevitable return of funds in search of the next “unicorns”. The Fed just isn’t that important.