The nine most terrifying words in the English language are: ‘I'm from the government, and I'm here to help,’

Ronald Reagan

The other day I saw a kid, pitching a fit, fire his Matchbox car down to the cement from the high perch of his $700 push chair. His mom recovered it for him - just so he could do it again.

We’ve raised a generation, two actually, who have never been spanked and never seen anything but easy money, loose credit, bull markets, and lax employment. In 2023, start-ups created 3.7 million new jobs while the total gain, across the entire economy, was only 2.7 million - implying a 1 million net loss ex-start-ups. In total, start-ups account for 4% of the total private sector workforce. Add in their first cousin, business owned by private equity funds - which employ another 12 million people - and the proportion of total employment rises to 11%. Throw in the suppliers to those PE businesses and the total is 16%.

Forbes 30 Under 30: average 27 years of age, 50% Zoomers, and has raised more than $3.6bn of funding. Excluding the clickbait (i.e. professional athletes and celebrities) on the list, they are almost entirely child millionaires who’ve otherwise never held a job, now at the helm of businesses younger than Mike, most of whom I wouldn’t trust to walk him. My current employer, who made the list, is one rare exception. Nine are “content creators.” All but a handful are doing something AI, renewable, online or in venture capital. The few exceptions, a small clique of hedge fund quants and hot shot wealth managers, can be found in the Finance category, however, the other two-thirds are crypto or FinTech bros - one of whom is making wine investing accessible to the masses.

The headline economic numbers - and to save space I excluded private equity, but please take my assurance that all those charts look identical to all these — show venture capital funds raised 3.5x as much money in ‘21 and ‘22 as in ‘16 and ‘17. However, even before the disruption of on-again / off-again tariffs, and other economic changes abundantly sensationalized in legacy media, there was a growing condition of constipation among VCs - being unable monetize investments. Specifically, the sum of exits the last three years has only been half of what it was in just ‘21 alone.

VC’s are also running out of places to put that money that could even plausibly turn a profit. Uninvested VC funds — so called “dry powder” — as a percentage of assets raised per annum, after steadily declining for 15 years, has suddenly gapped up from 150% to 450%.

Rivers always lead to the sea and whenever there is too much money chasing not enough stuff to buy, all roads always lead back to 1850 K Street, The Federal Reserve. Not coincidentally, the trend in VC fundraising looks quite similar the Fed’s ballooning balance sheet during ‘19 to ‘21.

That’s because fundraising was, of course, fueled by SPAC exits -i.e. everybody found some even higher risk stuff to hold while the Fed was mass-feeding on collateral.

It wasn’t just highfalutin venture capitalists looking for the start-ups who saw the shelves go bare, but also shoppers at Ralph’s, Raley’s, Macy’s, and Dunkin’ Donuts: core inflation gapped up to 5% above trend during the COVID-era liquefication.

Meanwhile, deficit spending exploded once, during the 2008 GFC, and then again, during COVID, with debt increasing by nearly 80% of GDP in the span of about one decade.

One would not be wrong to think that more than doubling the total debt load while achieving a lower funding rate, with yields falling from 4.5% to 50 Bps, should be counterintuitive because normally consuming twice as much credit should demand a higher interest rate not a lower one.

However, this magic was achieved by The Federal Reserve buying as many treasuries as it could hold, their balance sheet swelling from 5% of GDP to 36% at the peak - with Treasuries accounting for the preponderance of that. This to control 10 year rates, however, at the expense of flooding the economy with the dollars used to buy the bonds.

The problem was, however, that all that stimulus plus all those dollars, all pumped into the economy at the same time combined with interest-free money, all hit while everything was almost totally shuttered - which triggered the run away inflation mentioned above and repeated below.

So, then - er now - the Fed faces a choice: higher rates or higher inflation. Their preference for raising rates has been made clear by their actions.

What’s been going on cannot keep going, and some might get the first spanking they have ever seen. Back to lighthearted fun-loving travelogues next week.