Sunday, July 17, 2011

This Is How a Currency Ends: QE2 Keeps Flooding Into Silicon Valley

Students of Austrian economic theory are doubtless familiar with its explanation of inflation and hyperinflation. A central bank, facing pressure from politicians to spur economic growth by increased lending, turns on the printing presses and floods other banks with new cash. The new reserves make lending less risky for the other banks, and interest rates go down. The new money gets lent out to other businesses, but without a corresponding increase in the quantity of goods in the economy, the prices of those goods are inevitably bargained upward. For those who are first in line for the new money, this is awesome: they have more money to buy things at the old prices. For the rest of us, it sucks, because the higher prices inevitably find us before the money trickles down. With Ben Bernanke and the Federal Reserve pumping $600 billion into banks since last November, worriers like us have watched for signs that this money is manipulating the economy into growing. And in the past few months, since well-connected Silicon Valley VCs are almost certainly at the front of the QE2 line, we've started to see the effects on engineer salaries and office rents in the Valley and San Francisco. And with this report in today's LA Times, it looks like the artificial tech boom in the Valley is not slowing down.

The Times makes a persuasive case for a manipulated economic recovery in the Valley. Home prices in its most desirable corners are soaring; Palo Alto's median price has jumped 11%, to almost $1.6 million, in the past year. The 101 is jammed with traffic, and lined with signs advertising for job openings for software engineers. Some of these programmers are starting with six-figure salaries, and some recruiters are offering referral bonuses like iPads and wine-country vacations, as well as cash. Office rents and hotel occupancy rates have seen double-digit increases in the past year. Billions of dollars are pouring into funding rounds for tech firms preparing IPOs; VCs have pumped $2.3 billion into start-ups in the first quarter of 2011 alone, up 53% from a year ago. Facebook might go public with a ludicrous valuation over $100 billion; Twitter is now valued at $8 billion in spite of, you know, not having a way of making money. Bigger firms like Google and Microsoft are paying top dollar to gobble up start-ups as well.

Of course, it's important to keep reports like this in context. Unemployment in Santa Clara County, while much lower than the average in recession-battered California, is still above the unsettling national average at 9.7%. And the post-IPO experiences of LinkedIn and Pandora suggest that investors are much more skeptical of Internet businesses these days than they were in, say, 1998. Which points to the problem of trying to create a recovery through currency manipulation. If all we get out of QE2 are a few more expensive homes in Palo Alto and a ton of worthless Internet stocks, will it really have been worth debasing the dollar to get there?

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