A headline at Forbes.com last week indicated rising layoffs at Silicon Valley start-ups that are said to foretell a "quiet summer" for venture capitalists. On the same day, an A1 story in the Wall Street Journal reported that “Highflying startups have been grounded, swiftly, by the new climate: layoffs, skeptical investors, an exodus of funds and the prospects of a valuation haircut.”
Such is life in relentlessly capitalistic northern California. Though California’s business climate is said to be going “socialist” by partisans who really should know better, the reality is that capitalism is practiced in California in ruthless fashion. As is well known, somewhere in the range of 90% of startups out there fail, and as evidenced by the report from the Journal, they’re quickly put on a tight leash by their investors as their short and long-term prospects begin to dim.
Scary about all this is that Silicon Valley is the most prosperous economic sector in the world’s most prosperous country economy. If Valley businesses are in trouble, this will be felt around the U.S., and realistically around the world. Technology businesses on their own powerfully enhance broad business productivity, not to mention how much economic activity around the U.S. (and world) is fueled by what happens in northern California.
With all of the above top of mind, should the Federal Reserve intervene? Should it reduce interest rates or increase so-called “money supply” to boost the spirits of “skeptical investors” while reversing “the exodus of funds” reported by the Journal? Try to be serious. If you’re ever in search of evidence that the Fed’s power is exponentially more mythical than real, look to Silicon Valley.
For one, global market forces would powerfully overwhelm any central bank efforts to reverse the outflow of funds. And it wouldn’t even be a contest. What meager amounts of credit or “money supply” that the Fed would supply Valley banks with would be dwarfed by investors feverishly shrinking their exposure.
But wait, some will say. The Fed can go to zero! It can make credit costless, don’t you know? Except that the Fed can do no such thing. A producer of no credit itself, the Fed can’t decree costless what it doesn’t produce.
Better yet, the surest sign that the Fed’s zero rate fantasies have no real-world relevance is the business and startup culture in Silicon Valley. Think about it. If the Fed can decree credit free as the simple in our midst routinely claim, why do Valley startups routinely hand over large equity positions to venture capitalists in return for cash? Rather than give up equity, wouldn’t they just take on debt for free? They would certainly like to, but there’s not much of a debt market for businesses that fail over 90% of the time.
That there’s no debt finance in Silicon Valley is the surest signal to those interested in reality over fantasy that the Fed’s power to influence much of anything is the stuff of clueless academic theorists as opposed to something to seriously contemplate. No doubt economists buy into the Fed’s importance. Why wouldn’t they? The Fed employs more economists than any entity on earth. No doubt journalists buy into the Fed as all powerful planner of economic outcomes. Why wouldn’t they? This is what economists tell them.
The good news is that reason ultimately intrudes on the fabulist thinking of the overeducated and gullible. Actual market forces always, always, always have their say. Prosperity can’t be legislated, or forced, as much as it’s a consequence of free flowing capital. And unless capital can exit dicey situations (think again of the failure rate in Silicon Valley), it can’t enter them in the first place.
Which means the Fed can operate as a full employment act for economists who couldn’t operate in any kind of real world setting, along with business journalists who exist to promote the central-bank mythology. The rest of us can look away. No amount of Fed fiddling will deter an investment exodus from the Valley, nor can the same central bank restrain an inevitable return of funds in search of the next “unicorns.” The Fed just isn’t that important.
