These big tech layoffs are completely predictable
The cause of the cutbacks are not what you think
I recently wrote about irrational exuberance in the markets as general commentary on the state of our economy. It was a timely article as several big tech companies announced mass layoffs this week. Unfortunately some of my friends have been affected.
How could this happen? Have markets failed us? Is our economy broken? The answer to the last one is yes. But probably not why you think.
Anyone who was raised in a market economy understands that borrowing money requires paying interest. It seems reasonable. Borrowing money is using someone else’s savings. The lender could spend those savings on something else. How do you incentivize them to lend it to you? You need to compensate them.
What happens if there are a lot more borrowers than lenders? Or more demand than supply? The interest rates go up. In other words, interest rate is just the price of borrowing.
What do interest rates have to do with layoffs? Simple. Imagine an institution that has the power to control these interest rates. They can drive the interest rates down by creating unlimited money out of thin air and lending it out to banks, pension funds, hedge funds, and the federal government - anyone who is close enough to that institution.
The money doesn’t just sit there. It gets spent. Maybe it’s lent out to entrepreneurs to start a new business. Maybe it goes straight into the stock market or the housing market. Maybe it buys tanks and rockets for the military. There’s many ways to spend a trillion dollars.
Eventually, this money makes its way to the regular consumer - you and I. We start feeling good so we spend it. Shopping more on Amazon; buying that big house; speculating a little bit more on the ever rising stock market. Maybe even buying a second Tesla.
In turn, the corporations notice the consumers appetite and increase production. That requires more workers; more warehouses; more trucks; more forklifts. It’s an economic boom.
Unfortunately, the money spigot eventually runs dry. Turns out that printing money causes inflation. Our favourite institution has to reverse course. Interest rates go up. The money runs out. And reality starts sinking in. The land, labour and capital that was accumulated during the boom was just malinvestment. It wasn’t real prosperity. The house with the mountain view isn’t worth the billion dollars you paid for it. The warehouse Amazon built isn’t necessary. The workers that were hired unfortunately are not needed. The whole thing was a sham.
Well, I got news for you. We have that institution. It’s called the federal reserve. What was conveyed is the Austrian business cycle. It was described 100 years ago by Ludwig von Mises. And we’ve learned nothing in that time.