Search the archive.

One core argument made by anti-monopolists who oppose large companies and argue that kill zones and killer acquisitions are real and harmful is that small firms are inherently more innovative than large firms. As FTC Commissioner Christine Wilson argued, “[M]any today believe that small firms are inherently more innovative than large ones, so that the acquisition of a small firm by a large one necessarily reduces innovation.”45 For example, Tim Wu recently testified before Congress that innovation in technology sectors would increase if government imposed greater regulations and increased antitrust enforcement because “[o]ver the last century, competitive, open sectors—ecosystems—have proved themselves superior to those monopolized or dominated by a ‘big three’ or ‘big four.’”46

In fact, large companies are as or more innovative than small firms. In a 1996 paper, Wesley M. Cohen and Steven Klepper found that large firms invest more in R&D as a share of sales.47 The number of patents and innovations produced per R&D dollar decline with increasing firm size. But they argued that this reflects a mismeasurement of innovation outputs. Large firms benefit from “cost spreading,” because they can spread the benefits from one innovation across more units and products, leading to a greater overall level of innovation per unit of R&D. They wrote, “Not only does cost spreading provide the basis for explaining the R&D-size relationship, it also challenges the consensus that has emerged from the R&D literature that large firm size imparts no advantage in R&D competition.”48

In conclusion, it should be no surprise that despite the publicity that rewards the rare successful tech startup, most small businesses are not innovative. Few of them want to be. In a 2011 study, Erik Hurst and Benjamin Wild Pugsley found that most small businesses do not intend to grow or innovate.77 Most small business owners cited nonpecuniary reasons, such as being their own bosses or having flexible schedules, as their motives for starting a company; only 41 percent had a new business idea or sought to create a new product.78 Only 15 percent of new businesses surveyed planned “to develop proprietary technology, processes, or procedures in the future.”79 This is not to say that tech startups and small R&D-intensive firms are not important to driving innovation, but to privilege small over large when it comes to innovation is a fundamental mistake.

(David, Ph.D. in Economics from the University of Michigan, Senior Economist, “pg online @ https://cepr.net/the-washington-posts-debt-cult/ //um-ef)

The standard economics argument against the problem of high deficit and debt is that it will lead to higher interest rates. We have been seeing extraordinarily low interest rates ever since the Great Recession. Now, this is supposed to be bad because it allows for investment projects of little value to go forward. This makes zero sense. Having projects little value move forward is bad if there is a better use for the resources. Implicitly, there is no better use, which is why interest rates are low.

(David, Ph.D. in Economics from the University of Michigan, Senior Economist, “pg online @ https://cepr.net/the-washington-posts-debt-cult/ //um-ef)

The Washington Post is always telling us that debt, especially government debt is bad, very bad. It’s not quite sure why or how, but debt is definitely bad. We got the latest confused entry from the Post’s debt cult today, warning us about some “tipping point” that we are at risk of passing. The notion of a tipping point on government debt had its shining hour when a paper by Harvard professors Carmen Reinhart and Ken Rogoff purported to show that when a country’s debt-to-GDP ratio crossed 90 percent, it led to sharply slower growth. While this paper was used to justify austerity in countries around the world, it turned out that the result was driven by an Excel spreadsheet error, as shown in a paper by University of Massachusetts economists Thomas Herndon, Michael Ash, and Robert Pollin. When the error was corrected, the data showed no 90 percent tipping point. This piece acknowledges that the United States is not likely to see a tipping point, where it can’t sell its debt: “That scenario has afflicted numerous smaller economies. But such an outcome seems less likely for the United States, given the primacy of the dollar in the world economy and the country’s long track record of relative economic stability.” While the U.S. dollar is still the preeminent currency in transactions and as a reserve currency, this is not a necessary condition for it being able to issue large amounts of debt without creating a crisis. Japan’s debt to GDP ratio is more than twice as high as in the U.S. and it had near zero interest rates and near zero inflation, just before the coronavirus crisis.

(Ph.D., Economics, New School for Social Research B.A., Economics, University of Maryland at College Park, “Budgeting For Recovery,” pg online @ https://files.epi.org/page/-/bp253/bp253.pdf //um-ef)

The size of a nation’s capital stock is a key driver of productivity growth, and productivity growth defines how fast living standards can rise. The crowding out of private-sector investment that occurs when governments increase budget deficits in a healthy economy is the prime argument for a hawkish view against rising budget deficits when the economy is healthy. Budget deficits in a weak economy: shock absorbers that ‘crowd in’ investment However, this deficit hawkishness is profoundly destructive if practiced when an economy is sick. When employment and capacity utilization rates are low and falling even as the interest rates controlled by the Federal Reserve are at or near zero, there is no reason to fear that rising deficits will crowd out private investment. So long as there are idle resources in the economy, deficits will tend to increase both savings and investment in roughly equal measure, leading to no sustained upward pressure on rates. The current recession became a catastrophe because American consumers rapidly pulled back on their consumption spending in the wake of the bursting housing bubble. The personal savings rate has jumped from essentially zero at the beginning of the recession to almost 7% today, representing an extraordinary pullback in consumer spending. Hatzius (2009) estimates that this spending pullback was even larger than the one that precipitated the Great Depression. In the simple loanable funds scenario, the rise in savings enabled by this pullback in private spending by households should have led to a sharp decline in interest rates and a rise in investment by businesses, and this swap of increased business investment for reduced consumer spending should have kept the economy from entering a prolonged recession. However, instead the recession has led private businesses to sharply decrease their own investment spending even as interest rates have fallen. After all, when a large portion of existing plant and equipment is standing idle, building more does not make a lot of sense, even if the cost of financing is low. This highlights a key problem with the naïve version of the loanable funds theory of investment—both savings and investment depend on overall national income. In a healthy economy with high and stable employment rates, national income is generally stable and the loanable funds model works relatively well at predicting what will happen to interest rates. However, when overall national income is changing rapidly (say because of a steep recession), the model becomes an unsuitable guide for predicting interest rate changes.

(Economic Policy Institute, “THE CASE FOR GOOD DEFICITS,” pg online @ https://www.epi.org/press/the_case_for_good_deficits/ //um-ef)

Finally, Bivens also refutes the hawks’ claims that today’s budget deficits will unfairly burden future generations. He shows that, to the contrary, wise public investments made now to jumpstart a recovery and build the infrastructure to support a health economy going forward will benefit future generation while not crowding out any private investments that may benefit future generations. Rather than leaving the next generation an economy scarred by an unnecessarily long, lingering recession, he argues that the right kind of spending now is needed to lay the foundation for a healthy economy for generations to come.

(Thomas, Director of Research, Southwest Region at Stream Realty, “Will Tighter Monetary Policy Spell The End For Unprofitable Zombie Companies?,” pg online @ https://streamrealty.com/will-tighter-monetary-policy-spell-the-end-for-unprofitable-zombie-companies/ //um-ef)

Zombie firms may crowd out lending that would otherwise go to more productive uses, eroding the long-term strength of the United States economy and the U.S. workforce–whose skills and talents are better spent at a firm generating real economic value. It’s evident that Zombie companies also invite speculation, which was apparent during the SPACs boom and meme-stocks that thrived in a financial system flooded with trillions in Covid-related economic relief money. Millions of Americans may even own zombie companies and not know it. In fact, if you own an index fund, chances are a zombie company lurks within!

An unexpected result of the pandemic era has been a surge in entrepreneurial activity. Since 2020, applications to start new businesses have skyrocketed, reversing a decades-long slump.

The reasons for the boom are manifold. Millions of people were suddenly laid off, giving them the time, and inclination, to start new businesses. Personal savings jumped, buoyed partly by a frothy stock market and government stimulus payments, providing would-be entrepreneurs with the means to fulfill their visions. Rock-bottom interest rates made money cheap and widely available.

(Ashley, “SVB collapse is double-whammy for tech startups already navigating brutal market,” pg online @ https://www.cnbc.com/2023/03/19/svb-fail-is-double-whammy-for-startups-dealing-with-plunge-in-venture-.html //um-ef)

ChartHop CEO Ian White breathed a major sigh of relief in late January after his cloud software startup raised a $20 million funding round. He’d started the process six months earlier during a brutal period for tech stocks and a plunge in venture funding. For ChartHop’s prior round in 2021, it took White less than a month to raise $35 million. The market turned against him in a hurry. “There was just a complete reversal of the speed at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments. Whatever comfort White was feeling in January quickly evaporated last week. On March 9 — a Thursday — ChartHop held its annual revenue kickoff at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White was speaking in front of more than 80 employees, his phone was blowing up with messages. White stepped off stage to find hundreds of panicked messages from other founders about Silicon Valley Bank, whose stock was down more than 60% after the firm said it was trying to raise billions of dollars in cash to make up for deteriorating deposits and ill-timed investments in mortgage-backed securities. Startup executives were scrambling to figure out what to do with their money, which was locked up at the 40-year-old firm long known as a linchpin of the tech industry. “My first thought, I was like, ‘this is not like FTX or something,’” White said of the cryptocurrency exchange that imploded late last year. “SVB is a very well-managed bank.” But a bank run was on, and by Friday SVB had been seized by regulators in the second-biggest bank failure in U.S. history. ChartHop banks with JPMorgan Chase , so the company didn’t have direct exposure to the collapse. But White said many of his startup’s customers held their deposits at SVB and were now uncertain if they’d be able to pay their bills. While the deposits were ultimately backstopped last weekend and SVB’s government-appointed CEO tried to reassure clients that the bank was open for business, the future of Silicon Valley Bank is very much uncertain, further hampering an already troubled startup funding environment. SVB was the leader in so-called venture debt, providing loans to risky early-stage companies in software, drug development and other areas like robotics and climate-tech. Now it’s widely expected that such capital will be less available and more expensive. White said SVB has shaken the confidence of an industry already grappling with rising interest rates and stubbornly high inflation. Exit activity for venture-backed startups in the fourth quarter plunged more than 90% from a year earlier to $5.2 billion, the lowest quarterly total in more than a decade, according to data from the PitchBook-NVCA Venture Monitor. The number of deals declined for a fourth consecutive quarter. In February, funding was down 63% from $48.8 billion a year earlier, according to a Crunchbase funding report. Late-stage funding fell by 73% year-over-year, and early-stage funding was down 52% over that stretch. ‘World was falling apart’ CNBC spoke with more than a dozen founders and venture capitalists, before and after the SVB meltdown, about how they’re navigating the precarious environment. David Friend, a tech industry veteran and CEO of cloud data storage startup Wasabi Technologies, hit the fundraising market last spring in an attempt to find fresh cash as public market multiples for cloud software were plummeting. Wasabi had raised its prior round a year earlier, when the market was humming, IPOs and special purpose acquisition companies (SPACs) were booming and investors were drunk on low interest rates, economic stimulus and rocketing revenue growth. By last May, Friend said, several of his investors had backed out, forcing him to restart the process. Raising money was “very distracting” and took up more than two-thirds of his time over nearly seven months and 100 investor presentations. “The world was falling apart as we were putting the deal together,” said Friend, who co-founded the Boston-based startup in 2015 and previously started numerous other ventures including data backup vendor Carbonite. “Everybody was scared at the time. Investors were just pulling in their horns, the SPAC market had fallen apart, valuations for tech companies were collapsing.” Friend said the market always bounces back, but he thinks a lot of startups don’t have the experience or the capital to weather the current storm. “If I didn’t have a good management team in place to run the company day to day, things would have fallen apart,” Friend said, in an interview before SVB’s collapse. “I think we squeaked through, but if I had to go back to the market right now and raise more money, I think it’d be extremely difficult.” In January, Tom Loverro, an investor with Institutional Venture Partners, shared a thread on Twitter predicting a “mass extinction event” for early and mid-stage companies. He said it will make the 2008 financial crisis “look quaint.”

(Ashley, “SVB collapse is double-whammy for tech startups already navigating brutal market,” pg online @ https://www.cnbc.com/2023/03/19/svb-fail-is-double-whammy-for-startups-dealing-with-plunge-in-venture-.html //um-ef)

Next month will mark 18 months since the Nasdaq peak, and there are few signs that investors are ready to hop back into risk. There hasn’t been a notable venture-backed tech IPO since late 2021, and none appear to be on the horizon. Meanwhile, late-stage venture-backed companies like Stripe, Klarna and Instacart have been dramatically reducing their valuations. In the absence of venture funding, money-losing startups have had to cut their burn rates in order to extend their cash runway. Since the beginning of 2022, roughly 1,500 tech companies have laid off a total of close to 300,000 people, according to the website Layoffs.fyi. Kruze Consulting provides accounting and other back-end services to hundreds of tech startups. According to the firm’s consolidated client data, which it shared with CNBC, the average startup had 28 months of runway in January 2022. That fell to 23 months in January of this year, which is still historically high. At the beginning of 2019, it sat at under 20 months. Madison Hawkinson, an investor at Costanoa Ventures, said more companies than normal will go under this year. “It’s definitely going to be a very heavy, very variable year in terms of just viability of some early-stage startups,” she told CNBC. Hawkinson specializes in data science and machine learning. It’s one of the few hot spots in startup land, due largely to the hype around OpenAI’s chatbot called ChatGPT, which went viral late last year. Still, being in the right place at the right time is no longer enough for an aspiring entrepreneur.

Critics have argued that MMT is not a theory because there is no mathematical model. Others have argued that there is a theory but that there is nothing new and, even if there is, it is not valid, it is misleading, and it pushes the logic too far. For example, Palley (2014, 2) notes that MMT fails “to produce a model and […] that is why they fail to advance debate. If MMT-ers did produce a model, I am convinced […] readers would also see there is ‘no there there.’” Others, like Palley, have argued that “MMT often boils down to nothing more than an especially naïve sort of Keynesianism” (Selgin 2019) with “nothing new under the sun” (Cachanosky 2021) or that, as Rogoff (2019) put it, MMT “is just nuts” and a bunch of “nonsense” that will lead to disasters if applied to policymaking (Summers 2019). Like all economic frameworks, MMT builds on past theoretical developments to improve our understanding of how the economy operates. Through this framework, MMT proponents arrived at some well-known conclusions, but to argue that there is nothing new is a mistake. Among the most striking conclusions of MMT is that taxes and issuances of securities are not a source of funds for government spending, “deficit financing” is not an appropriate terminology, and government spending proposals should not be scored and voted on based on their impact on the public debt. MMT completely changes the way of thinking about government budgeting procedures and changes the approach to taxes and government spending. This alone ought to be considered innovative, although it builds on the macroeconomic work of Abba Lerner and Beardsly Ruml in the 1940s, the credit theory of money developed by A. Mitchell Innes in the 1910s and Thomas Smith in the 1830s, as well as the monetary experiments and observations of economists and politicians all the way back to Adam Smith and Jean Baptiste Say, and the US 6 colonies in the 17th and 18th centuries (Forstater 2006; Ruml 1946; Lerner 1943; Smith 1832; Innes 1913, 1914; Grubb 2008). One can retrace the origins of MMT’s conceptualization of government finances all the way back to Roman times when jurist Julius Paulus, noted “the importance of public authority backing money and the fact that the value of money does not depend on its substance” (Rüfner 2016, 99). Similar experiences can be found in ancient and early imperial China (Thierry 1993), ancient Greece (Peacock 2006), and Africa (Forstater 2006).

The British economy is flailing and the pound is cratering. The American economy is flailing and the dollar is strengthening.

Indeed, the dollar is  it has been in a generation. This year, it has appreciated roughly 16 percent against the euro, 21 percent against the pound, and 30 percent against the yen. It has also gained significantly against the currencies of a number of low-income countries. This is not because the United States is doing well per se, but because it occupies a strange sweetheart position in the global economy—one that stands to become sweeter as the world yet again teeters on the brink of recession.

In short, the dollar prevails as a unit of measure, medium of exchange, and store of value vis-à-vis global market participants. Critically, it maintains this asymmetric position on account of four discrete variables: incumbency, stability, liquidity, and a lack of alternatives.

We first encounter the notion of “monetary hegemony” in Michael Hudson’s “Super Imperialism” (1972: 9–60) as one state’s asymmetric relationship with respect to the global economy and its institutions. Adding Cohen’s layer of “acknowledged responsibilities and privileges” (1976: 37–50) – and Germain and Schwartz’s understanding of an “international currency” as one used beyond its political borders (2017: 765–787) – it is clear that the dollar fulfilled this role officially during the Bretton Woods era beginning in 1944. Despite the removal of fixed pegs in 1973 — the “Nixon Shock” — the dollar proved to be sticky. It maintained its incumbency through the Volcker years, as measured by its usage as the IMF’s reserve currency and the de facto currency of trade.

(Matt, “How the Government Pulls Coronavirus Relief Money Out of Thin Air,” New York Times, pg online @ Proquest //um-ef)

But the Fed isn’t an ordinary bondholder: By law, it has to pay its profits to the Treasury. That means when the Treasury makes payments on bonds held by the Fed — either paying interest or paying it off at maturity — almost all the money eventually moves back to the Treasury. When a government bond is involved, the cash moves from one government pocket to another. “Once the central bank buys them, it’s as if the Treasury never issued them in the first place,” said Dr. Kelton, who was an adviser to Senator Bernie Sanders’s 2016 presidential campaign. “For all intents and purposes, they’re retired.” The CARES Act borrowing is, in many ways, the natural result of an evolution that began with the 2008 financial crisis. The bond-buying programs that central banks undertook around the world helped ensure low-cost financing for governments running giant deficits as policymakers contended with a deep recession and a prolonged period of lackluster growth. And despite constant, high-decibel warnings that such an approach would surely ignite a surge of inflation, it never happened. That was a legitimate concern: Financial historians often point to disastrous periods when a central bank printed money for the government to pay its debts. A common example is Weimar Germany, when the central bank churned out banknotes that allowed the fragile government to repay onerous World War I reparations with essentially worthless marks, impoverishing most of the country in the process. But at other times, the idea has worked just fine: Japan’s central bank has been buying huge chunks of the government’s bonds — effectively financing the central government of the world’s third-largest economy for years — without triggering the kind of inflation that traditional economic views would expect. Adherents of M.M.T. have long argued that the United States can — and probably should — run much larger budget deficits than it did already. In recent years, this belief has been most often associated with left-leaning politicians such as Mr. Sanders and Representative Alexandria Ocasio-Cortez of New York. But the ideas have found broader currency in some unlikely places, such as Wall Street. In recent years, some at huge money management firms and gold-plated investment banks have increasingly turned to M.M.T. as a useful analytical framework to understand the strong links between central banks and markets that have grown since the financial crisis. “M.M.T. has been invoked so many times by completely mainstream people and politicians,” said L. Randall Wray, a professor of economics at Bard College who has written seminal papers on modern monetary theory. “Even Trump used almost word for word what we’ve been saying all along.” (“You never have to default because you print the money,” Mr. Trump said as a candidate in 2016.)

(Richard, PhD from Princeton University “The Specter of Default: How Safe Are U.S. Treasuries?,” pg online @ https://knowledge.wharton.upenn.edu/article/the-specter-of-default-how-safe-are-u-s-treasuries/ //um-ef)

Borrowers who get in over their heads typically find loans harder and harder to get, and are generally forced to pay ever-higher interest rates as lenders worry about potential default. But U.S. Treasuries operate in a world of their own. Because the government stands behind them with its taxing power, investors consider Treasuries to be very safe — virtually the only type of bond that is free of default risk. (Like other bonds, Treasury prices can rise and fall as they are traded. Prices, for instance, fall when investors perceive a greater risk of inflation, which undermines the value of fixed-interest earnings. Prices of existing bonds can also fall when a rise in prevailing interest rates makes older bonds with low yields less desirable than new bonds with higher yields. The term “riskless” refers only to default risk, not interest or inflation risk.)

In a default, interest rates on U.S. Treasurys would skyrocket (because investors would demand a higher rate in exchange for taking the risk that they might not be paid back), and Treasurys might no longer be usable as collateral (because their underlying value would not be clear). The entire world financial system could simply freeze. Moreover, one of the main tools used to contain the 2008-09 crisis—massive money creation by the Federal Reserve to fund purchases of U.S. Treasurys—might not work if the Treasurys market stopped functioning.

As in 2008-09, a global economic meltdown would hurt China a lot. It would fare slightly better than most other countries because it runs a closed-off financial system that relies mainly on domestic savings and is protected from the ups-and-downs of global financial instability by capital controls. But the impact of a U.S. debt default would still be devastating. In 2008-09, the loss of trade finance and collapse in global demand sent China’s exports plummeting by nearly 20 percent, and upwards of 20 million workers lost their jobs.

The good news is that a U.S. default is improbable. Most likely, Congress will reach a deal under which the debt ceiling is raised now in exchange for promises of federal spending cuts later. This is what the “Tea Party” Congress did in 2011 and the outcome that Senate Minority Leader Mitch McConnell has forecast.

Some governments such as that of China might try to offer alternatives to the US dollar, but they are unlikely to succeed.

Government-to-government transactions, for example for crude oil between China and Saudtti Arabia, could be denominated in yuan. But then the Saudi government would have to find something to do with the Chinese currency it receives. Some could be used to pay for imports from China, but  a lot less from China (about US$30 billion) than it exports (about US$49 billion) to the country.

(“US Debt and Foreign Creditors: Wall Street Journal,” pg online @ //um-ef)

The Wall Street Journal: A steady decline in demand for U.S. government bonds from foreign investors hasn’t been the disaster many analysts and investors feared it would be. Foreign ownership of U.S. government debt has been decreasing since it reached a peak of about 55% during the financial crisis in 2008, falling below 40% in November for the first time since 2003, according to the most recent Treasury data. That marks a striking reversal from the substantial accumulation of U.S. debt by foreign investors during the 2000s, when the government swung from surpluses to record deficits tied to tax cuts and increased spending on the wars in Iraq and Afghanistan and, later, the financial crisis. China, the largest foreign creditor to the U.S., owned as much as 14% of all outstanding Treasury debt in 2011. Today the country owns a little more than 7% of U.S. debt. Deficit hawks have suggested government bond yields could jump if foreign investors shed their holdings of U.S. debt, which in turn could push up the cost of other debt throughout the economy, such as mortgages and business loans. Those warnings haven’t come to pass. “The fears of the past were exaggerated,” said Tony Rodriguez, who oversees taxable fixed-income investing at Nuveen. Mr. Rodriguez said he expects domestic investors to continue to buy a larger share of the government’s debt, a shift he said isn’t problematic at its current pace. The Treasury Department sells debt in exchange for cash, which it uses to finance government operations. Rising deficits caused it to ramp up government borrowing last year following the $1.5 trillion tax cut and a deal to boost government spending by $300 billion over two years. Another factor boosting the size of Treasury auctions: the Federal Reserve is shrinking its portfolio of government and mortgage bonds, which it purchased to try to stimulate the economy following the crisis. That is forcing the Treasury to sell more securities to private investors. Last year, it increased its auctions of notes and bonds by about $335 billion, to $2.36 trillion from $2.03 trillion. Foreign investors absorbed a fraction of that increase, boosting purchases by just $13 billion in 2018. Gennadiy Goldberg, an interest-rates strategist at TD Securities, points to a couple of factors. First, dollar reserves in China have fallen since 2014, meaning less demand for U.S. Treasurys. Second, the cost of hedging against a decline in the U.S. dollar has risen, making it more expensive to hold dollar assets. The shift shouldn’t provoke fears that bond yields, which rise when prices fall, will “head to the moon,” said Jon Hill, a government debt strategist at BMO Capital Markets. “As certain investors step back, other investors are willing to step in and buy.” Domestic institutions and individuals have been filling the void. U.S. households increased their holdings of Treasury securities from $1.4 trillion in early 2017 to $2.3 trillion at the end of the third quarter of 2018, according to the Federal Reserve. China’s holdings of $1.1 trillion are less than the holdings of U.S. money-market funds and mutual funds combined. That has helped to keep a lid on interest rates. The benchmark 10-year yield has risen to about 2.7% from roughly 2.4% at the end of 2017.

Statement by Secretary of Defense Lloyd J. Austin III on the President's Fiscal Year 2024 Budget

"The FY 2024 budget is the most strategy-driven request we've ever produced from the Department of Defense. And as our National Defense Strategy makes clear, the People's Republic of China (PRC) is our pacing challenge. This budget seeks to meet this critical challenge today, tomorrow, and into the future by providing the resources today to continue to implement our National Defense Strategy and keep our nation safe while delivering a combat credible Joint Force that is the most lethal, resilient, agile, and responsive in the world.