How to Cut Interest Rates to Below Zero

An interesting thought from Greg Mankiw, Economics professor at Harvard:

Why can't the Fed cut interest rates to below zero? Why can't the Fed announce, for example, an interest rate of negative 2 percent? You borrow $100 today and repay $98 a year from now. A negative interest rate would certainly encourage people to borrow and spend, thereby expanding aggregate demand. [...]

The problem, you might reply, is that no one would lend money on those terms. Rather than lending at a negative interest rate, you could hold onto cash by, for example, stuffing it in your mattress. [...]

With this background, I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that, one year from today, it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

-- Greg Mankiw, Reloading the Weapons of Monetary Policy

The Fed is Buying Treasurys

It's time for a rare politics-related post on my blog.

In an unprecendented move[*], the United States Federal Reserve is now buying US Treasury government bonds (source 1, source 2). The debt issued by the US government is being bought by the US Federal Reserve. Instead of lending money from others, the government is printing money to finance its spending. Printing money could massively devalue the dollar in the long term.

Where's the outrage? The New York Times mentions this program in a single paragraph, even though we're talking $300 billion, almost half as much as the hotly contested stimulus from earlier this year. My sense is that the Fed chose a good news day to launch its initiative - with all the global news, this probably didn't have time to sink in.

[*] Update: Actually, this has happened once more than 50 years ago, but for a different reason.

A Good Time to Start a Company

Fabrice Grinda is one of my favorite entrepreneurs. He writes:

Aspiring Entrepreneurs: There is no better time to start a company!

The opportunity cost has decreased as many high paying jobs have disappeared and employment opportunities in general have lessened. If you have a job, companies will have less room to give generous bonuses and/or raises.

It’s going to be harder for entrepreneurs to raise money, but competitive pressures decrease dramatically in downturns giving you more chances to establish yourself as the leader in your field and more time to do so. [...]

If you have been thinking of creating a company, now is the time to make the plunge!

Paul Graham writes:

The economic situation is apparently so grim that some experts fear we may be in for a stretch as bad as the mid seventies.

When Microsoft and Apple were founded.

As those examples suggest, a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way.

People have been asking me what the downturn means for my plans. The answer is "little". I want to be very capital efficient, and if the investment climate is indeed as bad as the doomsters say, there will just be fewer of us, working more slowly on fewer features. The product might turn out even better.

Questions about the Startup Economy

I've been watching the meltdown from afar, catching bits and pieces on CNN International and the newspapers (which here in Thailand are focused on an entirely different problem). Like Sequoia, the media is all doom and gloom, but what does it really mean for startups? I don't have the answers, just questions:

1. Will there be venture capital? This time, dotcoms are not the cause, but Silicon Valley could come to a halt if investors are too spooked, or have no money to invest. There have been no IPOs lately, and the pace of acquisitions has slowed. Are VCs still thinking with a long enough horizon to invest in good ideas and teams? Do they have enough money from limited partners? I read somewhere that funds raised in the harsh times of 2001-2004 all had great performance. Let's hope limited partners remember that and will put money into 2008+.


2. Will there be layoffs? Are we about to see Microsoft, Google, and Yahoo shed thousands of workers? I think we are. I still remember Jerry Yang and David Filo teary-eyed, announcing Yahoo's layoffs in 2001. For great startups, this makes things easier: While great people won't get fired, they will be more poachable if you can offer a solid, productive environment free of drama.


3. Will enterprises still make IT investments? If not, any enterprise software startup is hosed.


4. Will consumers still have money to spend? If not, see point 3.


5. Will there be regional differences? In contrast to the US, European economies look surprisingly healthy, if you look at things like personal savings rates, foreign account deficits, and so on. This will make these markets much more interesting than before.


6. Will big companies reduce R&D expenditures? If Microsoft et al slow investments in new initiatives, this will be a great opportunity for startups to pull ahead, and just get bought when the down cycle ends.


7. What will be the effects of new regulation? Last time there was a problem, Congress introduced Sarbanes-Oxley, with the unintended effect of shutting down the ability to IPO. Almost certainly, there will be new legislation this time around - what consequences will it have?


8. How long will this take? I'd be surprised if this took decades, but it's entirely possible that this situation will take years to resolve.

On the plus side, I'm very happy that this is playing out while I'm on vacation. Instead of being caught up in the vortex, I can adjust my new company's strategy once there is a bit more clarity about what's going on. Also, I'm relieved to not be working for anyone right now. Nothing is more paralyzing than the fear of getting laid off.

Let's hope for the best.

Profiting from high gas prices

With gas at almost $5 a gallon, Americans are driving less. The Federal Highway Administration said U.S. drivers traveled 11 billion fewer miles in March 2008 than in March 2007, a decrease of 4.3 percent!

People are driving less, and they're driving slower to increase gas mileage. Miles driven are probably linearly correlated to the number of accidents. Insurers are not going to drop premiums and few drivers will think about reducing the miles per year they're insured for. Thus, car insurance companies are probably making a bundle. Is this the time to snap up some stock?

Two Views on Europe

I'm on a short trip to Europe to take care of some things. It's nice here: Well-architected buildings line pretty streets with cozy cafes and without homeless people.

But is it a good place for entrepreneurs? Two friends have sent me two articles with vastly different viewpoints.

The first comes from Foreign Policy: "Europe's Phiosophy of Failure". It points out the anti-capitalist attitudes found in Germany's and France's school textbooks. The author, Stefan Theil, claims that these textbooks portray capitalism as brutal, economic growth as a health hazard, and entrepreneurs as money-grabbing dictators. Having gone to high school in Germany myself, I didn't find this to be true. But times and textbooks may have changed since the pro-American 1990s.

The other article comes from BusinessWeek: "Europe's Crop of Billion-Dollar Babies". It features Giuseppe Zocco, co-founder of my favorite European VC firm, Index Ventures. Zocco talks about how "there are a lot of European companies founded in the past 5 to 10 years that can, with the right support, become billion-dollar companies." Can Europe build bigger companies than Silicon Valley with investors that have a longer time horizon? We shall see.

If you liked this, read: Why Startups don't Condense in Europe.

Economist Report on Migration

The Economist has a special report on migration this week. As someone who has uprooted his life three times to move to a different country, this is a topic close to my heart.

"The number of migrants in the world today, both legal and illegal, is thought to total perhaps 200m (though many of the figures, even those used by governments, are at best educated guesses). That sounds a lot, but it adds up to only 3% of the world's population, so there is great potential for growth."

I would have thought this number to be much higher: Far more than 3% of my friends now life in a different country than they were born in. However, it turns out my sample is skewed:


Switzerland has the second-highest foreign-born population percentage in the world. Similarly, San Francisco is a destination for many born outside the US.

Another interesting map from this issue:


While this map just a qualitative view, it seems like the cliche of the rich Western states is still alive. Count the directions of arrows: East to West: 12, vs. West to East: 6. Similarly, South to North: 10 vs. North to South: 3.

Airport Shop Economics

Stroll through Zurich Airport and you’ll notice that, as in many airports these days, a vast amount of high-class shopping awaits past security: Burberry, Chopard, Hermès, Armani, Gucci, Hugo Boss – they’re all there. If you want to spend $600 on a purse while waiting for your flight, you can.


The only things I’ve ever bought at airport shops are newspapers, magazines, food, drinks, coffee, and power plug adapters that I forgot to bring. I’ve seldom set my foot in one of the boutiques, much less bought something there. Almost everyone I know hasn’t either.

Consequently, it seems like a large percentage of airport floor space is wasted on shops that people don’t visit or buy goods from. Why are they still there?

Boutiques, in airports, as in downtown shopping areas, are high-margin, low-frequency businesses. Sure, they may not have as many visitors, but when someone buys that $600 purse, they’ve just paid for the entire morning’s rent and salary. The road to success is to charge a lot of money to a few people.

The reason why boutiques are omnipresent at airports is that they are especially well-frequented by people with lots of disposable income and a knack for lifestyle: The rich, the jeunesse dorée, executives, middle managers, consultants – these are people who can make that $600 impulse buy. For the other 80% of travelers, this floor space is wasted.


But there’s another reason for their presence: Airport managers love boutique shops. They pay the same rent as anyone else, but make the whole airport seem more upscale. The shops themselves are often beautifully designed and pleasing to the eyes of all travelers. Even if they never come inside.

Seven Things We Should Fix

It’s time to complain about the world’s imperfections.

7. Finding Parking: I’d rather have my car’s navigation system just tell my where the next parking spot is, instead of spending 20 minutes hunting for one.

6. Taxi Fleets: In Germany, your average taxi is a largish Mercedes. In the US, it’s a Crown Victoria. The city gas mileage for both is horrible. The incentives for cab operators to switch to hybrids are there: The cars cost the same, but the gas mileage is much better. Why aren’t we seeing faster adoption?

5. Different power plugs: Why does almost every country need to have a different type of power plug? Instead of carrying around an assortment of adapters, the countries of the world should sit together and agree on a global standard.

4. Power adapter bonanza: Why does each device need a different power adapter? If all electronics manufacturers sat down and agreed on a few common types, you’d never need to ask "does anyone else here own a Nokia"?

3. Power lines: Those huge masts are an ugly distraction in the landscape. Can't we dig holes and put it all underground?

2. Tickets: In the age of e-tickets, why do we still need physical tickets to concerts and public transportation?

1. Cash: Coins and bank notes? You have to carry them around and refill supplies when you run out. The fact that cash even exists creates opportunities for counterfeiting, money laundering, and other unwanted side-effects. We’re actually pretty far on this one, but some last rebel holdouts still refuse to take MasterCard or Visa.

NYC Profit Calculator

Here's a fascinating account of how businesses in New York - from cab driver to copy shop to the Museum of Modern Art - make money.

New York Magazine: The Profit Calculator

I feel like there are some lessons to be learned here. Cab drivers worry less about tips and more about your destination - if you take a ride out to Queens, they're losing money because they have to drive back through traffic. Yoga gurus sacrifice money for prestige. H&M pricing is essentially a variant of bait-and-switch, but with scarcely clad bikini models on billboards.