To start, let's talk mechanics for just one second. By now you've heard that when the Fed "prints money" there's no new cash actually entering the economy. QE is an asset swap. Reserves are created, but Treasuries are pulled out of the market and brought onto the Fed's balance sheet. The net wealth position of the private sector is unchanged. So right off the bat, there's no new money brought into existence that could rain down upon Silicon Valley. The mechanics of money creation don't work like that.
[This paragraph is inaccurate. Yes, Central Bank Reserves are printed and exchanged for Treasuries via Primary Dealers. That’s standard Central Bank so-called ‘open market operations’. But the exchange is not equal. When reserves enter the economy via the banking system they magically multiply because we have a fractional reserve banking system, whereby a portion of reserves are kept on hand and the rest is lent out. Private bank after private bank repeats this process until more money than the initial injection is created.]
It is true, to be fair, that monetary stimulus can contribute to positive risk appetite. And risk appetite can help catalyze investment into speculative assets.
[These two sentences effectively confirm the “popular story” he intends to refute in the first paragraph.]
But speculative inclination to invest is a complicated thing and there's no one policy that can just make it happen. So the link between investment and the Fed isn't 100% non-existent. However it works nothing like the popular "printed money goes into Adam Neumann's pocket" narrative that's become conventional wisdom.
[Here again the writer acknowledges that the Fed’s policy has some connection to speculative inclinations to invest, although at the moment he has not yet committed or stated what that connection is or how much is the impact. We are left to wonder.]
What's clear now though is that this boom in tech, which has lasted longer than a decade, has been fueled by tight money, rather than loose money. First of all, how can we establish that money has, in fact, been tight? It turns out that basically any analytical framework you use will tell you that. For one thing, inflation has been mild and below target for years and years.
[Here is a typical approach of financial writers, they fail to define terms. Which inflation is he referring? What are the numbers that support this statement? Again, we are left to wonder.]
Furthermore unemployment has been elevated, and persistently below potential.
[Similar comment as above: no numbers provided to support that statement. Also, “potential” is a fancy way for economist to guess what should be the true employment level, which no one knows for sure. The most problematic thing here is the confusion: he says that unemployment is below potential. That is a good thing. We want unemployment to be as low as possible. What Mr. Weisenthal meant to say is that employment is below potential.]
Meanwhile, rates at the long end of the curve have been extremely low over the last decade. What's that? Long end rates mean policy has been tight? Is this some weird MMT thing?
[Here the writer comes somewhat clean by stating that his definition of tight monetary policy is that long-term rates have been extremely low over the last decade. Although he does not mention it, it appears that he’s referring to UST; but again, he does not mention what specific points in the Treasury Yield Curve he’s referencing. Is the 10-, 20-, 30-year? We don’t know. But let us test the accuracy of this statement. Let’s pick the 30-year Treasury from ten years ago, let’s say, from March 1, 2011 which at that time it was 4.48%; in March 1, 2013 it was 3.06%; in March 2, 2015 it was at 2.68%; in March 1, 2017 it was at 3.06%; in March 1, 2019 it was at 3.13%; and in March 1, 2021 it was at 2.23%. So, yes, in comparison to today, rates have been low. But rates have been low in comparison to today across the entire tenor of the curve.]
Here's Milton Friedman in 1997 in the Wall Street Journal:
Initially, higher monetary growth would reduce short-term interest rates even further. However, as the economy revives, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
[That specific quote from Friedman is problematic. First, no mention is made as to what the Central Bank will do when the economy revives. Will the Bank continue to generate “higher monetary growth”? He doesn’t say. Mr. Friedman also says that it’s “misleading to judge monetary policy by interest rates,” yet that is exactly what he is doing. You cannot have it both ways.]
My emphasis added. Given low inflation, poor employment and low long-end interest rates, it's clear that policy has been tight, not loose, by basically anyone's analytical framework. And it's these tight conditions that have fueled the Silicon Valley boom. It's not complicated. When growth is scarce throughout the economy, it stands to reason that investors will pay more for companies that BYOG (Bring Your Own Growth), which aren't dependent on GDP. And so you get your high valuations on software and FANGs and Teslas and Ubers. In fact that last one, Uber, represents a business model that was specifically built for a tight money period, when labor was abundant, but capital was scarce. In fact many of the hottest gig economy, delivery-type startups have been predicated on abundant, cheap labor. The exact opposite of overheating.
[Like a salesman in desperation to sell something, Mr. Weisenthal is mixed up. Low inflation? Yet, as I said before, no one has a clue which “inflation” metric he is talking about. Poor employment? Yet, just prior to the Pandemic the US economy had historically low unemployment rates. He says that “labor was abundant, but capital was scarce”, but again, no proof of that is given.]
This above characterization of the interplay between monetary policy and tech isn't theoretical. In D.C. right now we're finally getting a real policy pivot. It's all systems go on the fiscal expansion. And the Fed is now committed to not raising rates until we get back to full employment, committing to letting inflation run warm. And now we're getting those higher long-end rates -- remember the Milton Friedman quote -- policy is loosening. And it's in this new policy stance that speculative tech has been getting hammered and underperforming badly (see ARKK, QQQ, SPAK etc.). With policymakers pulling out all the stops to boost GDP, there just isn't much reason to pay out the nose for growth anymore. Growth is not a scarce asset.
[Here he just said that “now we’re getting those higher long-end rates”. Compare to what? In a previous paragraph that “extremely low over the last decade”. Anyone with their thinking cap on would not take this article serious.]
If you've spent any time following Silicon Valley people on Twitter over the last year, you'll notice more and more of them sound like goldbugs, posting charts of the M2 Money Supply or the Fed Balance Sheet, or talking about inflation or the Chapwood Index to warn about the dangers of Fed largesse. And at first I thought this was just about them shilling cryptocurrencies and establishing a narrative around their Ethereum and Bitcoin bags. And that's a big part of it. But it's also increasingly clear that a truly hot economy removes Silicon Valley's monopoly on growth and the fat valuations that come along with it. So of course, many of them don't want the Fed and Congress to really let it rip.
[With a few ad hominem and straw-man arguments, he ends his article that in his mind has proved his flimsy theory. You would be wise to learn to spot this nonsense and pay no mind to it, if only to learn how not to think like Mr. Weinsenthal.]
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