
A founder's personal view of the impact of the financial crisis on SV's startup scene - jmorin007
http://eladgil.blogspot.com/2008/12/startup-founders-personal-view-of.html
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nostrademons
There's something that's really worrying me about the current economic
conditions: the combination of a drop in the CPI, the Fed funds rate going to
zero, and the yield on Treasuries going to zero. Together, they indicate that
deflation is not just a worry, _it's already here_. And once you enter a
deflationary spiral, it becomes very difficult to get out of it.

Deflationary depressions don't just last a year or two and then you snap out
of it, they can go on for _10 years_ or more. Actually, in most cases they
seem permanent: they continue until there is a war that forces the country to
spend or die. And during them, far more that the normal 80-90% of startups
die. (In a presentation at UIUC, Max Levchin flippantly remarked "85% of
startups die...that figure's been true throughout most of history, except
during the Great Depression, when 100% of them died." That's not quite true -
Disney and Hewlett-Packard were founded during the depression - but it's
pretty close.)

Some interesting reading:
[http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h...](http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18)

~~~
bokonist
1) Preventing a deflationary spiral is not that difficult. Declare a tax
holiday, and print money to fund government operations. Keep printing until
the price of land/gold/oil stabilize and start to rise again. At that point,
ease off and return to a stable money supply.

2) Money supply deflation usually only lasts a couple years, four years at
most. When the banks stop failing, the money supply stabilizes. Bernanke is
hard wired to err on the side of inflation, rather than deflation. so I would
not expect a deflation lasting more than a year or two.

3) Price deflation can last for decades, but that's a sign of a stable money
supply and a rising productivity ( for instance from 1980 to 2000 in the
computer industry). From 1870 to 1910 was a period of general deflation, but
it was perhaps the best time for startups in the history of the world.

4) The New Deal had a devastating effect on small businesses. The NRA, AAA,
OPA, and other alphabet agencies were insane. Here is a small taste: "The NRA
was discovering it could not enforce its rules. Black markets grew up. Only
the most violent police methods could procure enforcement. In Sidney's
Hillman's garment industry the code authority employed enforcement police.
They could enter a man's factory, send him out, line up his employees, subject
to minute interrogation, take over his books on the instant. Night work was
forbidden. Flying squadrons of these private coat-and-suit police went through
district at night looking for men who were committing the crime of sewing
together a pair of pants at night. But without those harsh methods many code
authorities said there could be no compliance because the public was not back
of it." source: <http://mises.org/books/rooseveltmyth.pdf> (p 45)

Want to try a startup with the code authorities breaking down your door to
stop you from coding at night? And then there were was the crush of paper
work, price regulations, etc: "A Michigan grocer who had run a successful
business for 40 years testified that 'For the last six months I have been
behind the counter ten hours a day, then up half the night filling out
government forms. Sunday is needed for inventory reports, ration accounts or
applications for coffee, sugar and canned goods. I couldn't keep up with it,
so I closed my doors.' Small food distributors were going out of business by
the tens of thousands a month." (p. 316)

~~~
yummyfajitas
Regarding 1), it's trickier than that. The issue is that there are two types
of inflation, monetary inflation (more dollars floating around) and price
inflation (stuff costs more money). Due to hoarding, these two types of
inflation may not agree with each other. If you inflate the currency by
printing money, much of it may be hoarded, since owning money is (in a
deflationary environment) an investment. So the money supply increases, but
consumer/investor prices continue to deflate!

Now you have large chunks of money hidden away, but prices continue to fall.
This continues, until you reach a tipping point and price inflation returns.
Then the hoarders spend their money, and prices inflate rapidly (price
inflation catches up with money inflation). This isn't a good thing, since
it's a major monetary shock, and can lead to a crisis of confidence, etc...

Probably the only way to avoid this scenario is to make sure that the newly
printed money has a high velocity, but it isn't clear how to do this. The
classical answer is to give it to lower income people, but it's not obvious
that this will work in a deflationary environment (poor person buys TV, TV
manufacturer hoards money).

~~~
bokonist
You're absolutely right about the two types of inflation. In fact, any
argument about inflation/deflation needs to start with throwing both words out
the window. Let's use the world "dilution" to refer to increases in the money
supply, and "contraction" to refer to decreases in the money supply. We'll use
"price level increases" and "price level decreases" to refer to price changes,
as reflected in the CPI.

 _If you inflate the currency by printing money, much of it may be hoarded,
since owning money is (in a deflationary environment) an investment._

The government must print enough money to offset the money lost through the
collapsing credit. Since the government is committing to keep the monetary
base stable or increasing slightly, there is no incentive to hoard. The
incentive to hoard only happens when their is a money supply contraction, not
a price level fall.

A depression happens when there is a sharp contraction in the money supply due
to a credit bubble collapse. Businesses that had grown addicted to credit,
fail first. Consumers, expecting their debt to be diluted away, now have to
save more and pay off their debts. Asset prices fall, causing a wealth effect
drop in spending. The net is that fewer green bills are chasing the same
number of goods, thus prices start dropping. Falling prices means less revenue
for businesses. The hardest sectors hit are those that are in debt, as they
borrowed assuming more money available to pay back the loans. But every sector
is hit hard because of sticky wages, menu costs, etc. Businesses start
freezing hiring and laying people off. The depression deepens.

The idea is that the Fed must inject money now to prevent the dominoes from
falling. If the Fed prints enough money and gives it to consumers, consumers
will be able to repair their balance sheets and quickly maintain or return to
pre-crash spending levels. Thus all the contracts and wage agreements assuming
the pre-crash money supply will be bearable, and no mass layoffs need happen.
The crisis is averted

The big key is not too print too much money, or you risk triggering a
hyperinflation. But by keeping a watchful eye on the hyperinflation canaries
(gold, oil, and real estate) the Fed should be able to get it right.

 _(poor person buys TV, TV manufacturer hoards money)._

That's fine - the point is to stop the TV manufacturer from having to make
layoffs do to falling demand. In the real world, the manufacturer probably
wouldn't hoard. Depending on their situation they might pay down debt, invest
in expansion, or return dividends to shareholder.

------
netcan
_Endowments have charters which limit the amount of their capital that can go
to high risk investments - in other words venture fund and private equity
firms. This means that they need to "rebalance" their portfolios and shift
money that would normally have gone into venture funds back into public
markets._

Am I understanding this correctly. They have a charter that determines the
balance. This means that is a certain mandated class losses value, they have
to top it up with funds from the other classes?

