02 Feb Who Built this Bezzle?
A little over a week ago, Bloomberg published an article – under the category heading “Equality” – noting that the present-day Tech Wreck is causing technology companies to cut costs in some interesting but unsurprising ways:
At Twitter, the diversity, equity and inclusion team is down to just two people from 30, one former employee said. A DEI worker who was let go from a popular ride-share company said their job search has stalled as other technology companies assess their finances. And just before getting the axe at separate tech giants this fall, two DEI specialists said leadership had stopped setting long-term goals for their departments entirely.
The layoffs sweeping the technology industry are gutting diversity and inclusion departments, threatening company pledges to boost underrepresented groups in their ranks and leadership.
Listings for DEI roles were down 19% last year — a bigger decline than legal or general human resources jobs saw, according to findings from Textio, which helps companies create unbiased job ads. Only software engineering and data science jobs saw larger declines, at 24% and 27%, respectively.
Regular readers may have guessed a couple of things here. First, this is not a surprise to us. DEI, like ESG, is what you might call a first-world problem. It is an indulgence, in other words, something that occurs on a mass scale only when times are good and money is plentiful for such extraneous, non-functional business expenditures. Second – and clearly related – this is, in our estimation, a contemporary manifestation of John Kenneth Galbraith’s concept of “the bezzle.” DEI and ESG are also forms of corruption as described by Galbraith in his classic The Great Crash: 1929:
In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle [described as “the inventory of undiscovered embezzlement”] increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks. Good times, when money flows freely and is invested eagerly, tend to foster corruption. Hard times, by contrast, when money is tight and invested only reluctantly and carefully, tend to provide the antidote for corruption and to force the crooks into more honest pursuits.
Now, as we say, regular readers probably could have guessed this, meaning that we’re not exactly breaking new ground here. We have long contended that DEI and especially ESG constitute serious and disreputable misallocations of capital and are, therefore, seriously corrupt practices.
What’s interesting here – or “new,” if you will – is the segment of the economy that is singled out by Bloomberg for its especially brutal pruning of the DEI bezzle, the tech industry.
And why is this so interesting?
Well…for two reasons.
First, we believe – and we ask you to bear with us a minute – that the tech industry itself is, in some ways, a huge part of the bezzle.
Second, because tech is part of the bezzle, it helps to illuminate who the real source of the corruption in our economy is.
With respect to the first point, consider the following:
Eighteen months ago, the online used car retailer Carvana had such great prospects that it was worth $80 billion. Now it is valued at less than $1.5 billion, a 98 percent plunge, and is struggling to survive.
Many other tech companies are also seeing their fortunes reverse and their dreams dim. They are shedding employees, cutting back, watching their financial valuations shrivel — even as the larger economy chugs along with a low unemployment rate and a 3.2 percent annualized growth rate in the third quarter.
One largely unacknowledged explanation: An unprecedented era of rock-bottom interest rates has abruptly ended. Money is no longer virtually free.
For over a decade, investors desperate for returns sent their money to Silicon Valley, which pumped it into a wide range of start-ups that might not have received a nod in less heady times. Extreme valuations made it easy to issue stock or take on loans to expand aggressively or to offer sweet deals to potential customers that quickly boosted market share.
It was a boom that seemed as if it would never end. Tech piled up victories, and its competitors wilted….
Cheap money funded many of the acquisitions that substitute for organic growth in tech. Two years ago, as the pandemic raged and many office workers were confined to their homes, Salesforce bought the office communications tool Slack for $28 billion, a sum that some analysts thought was too high. Salesforce borrowed $10 billion to do the deal. This month, it said it was cutting 8,000 people, about 10 percent of its staff, many of them at Slack.
Even the biggest tech companies are affected.
Does this mean tech entrepreneurs are corrupt? Nope. We’d guess that the industry probably has more than its fair share of fly-by-nighters and flibbertigibbets, but they’re not the core problem. They are merely taking of advantage of the core problem, which, we think, lies here:
[T]he Fed’s significant actions in the 14 years since the 2008 global financial crisis (“2008 Crash”) decoupled asset prices from risk and ignited an historic borrowing and debt binge. Those actions created a significant set of financial conditions and risks that the Fed and other policymakers are dealing with today. Put differently, the Fed is in many ways fighting problems of its own creation. And considering the scale of the problems, it is very difficult to solve without some damage….
The risks posed by these many macro issues would be significant for any normal economic cycle. But the last 14 years since the 2008 Crash have been anything but normal. Prior to the pandemic-induced market stress of March 2020 (“2020 Pandemic Stress”), the U.S. was having the longest economic expansion in its history2 fueled by the ultra-accommodative zero/near-zero-interest rate and massive asset purchase policies of the Fed. And, when the 2020 pandemic crisis hit, the Fed increased and expanded those ultra-accommodative policies. Investors were strongly incentivized if not forced into riskier assets, leading to mispriced risk and a buildup of debt that now threaten to make the potential fallout from any macro issues catastrophic. That is, the scale and scope of risks facing policymakers today didn’t start with the 2020 Pandemic Stress or Russia’s attack on Ukraine in 2022. It started with the Fed’s overly accommodative policies that were initially conceived of, launched, and implemented in response to the 2008 Crash with few if any reasonable checks along the way assessing risk taking, moral hazard, mis-formation and misallocation of capital, or other collateral consequences.
We included the Federal Reserve and the tale of its creation in The Dictatorship of Woke Capital for two reasons. It was, we noted, part and parcel of the Progressive movement’s efforts to create institutions removed from “the people” and their electoral powers. As such, it was a creation of the powerful, by the powerful, and for the powerful. And it remains so today.
The Fed is not our friend. It is not your friend. It is the source of more than a decade’s worth of profound corruption and misallocation of capital – INCUDING THE MISALLOCATION OF CAPITAL TO DEI AND ESG.
The old adage has it that investors should not fight the Fed. While this may be true, it is equally imperative that they (that is to say you!) should keep their eye on it. Its goals are not necessarily their/your goals. And its means are not necessarily sound.