(Too Much) Free Money

I found this article on YC News today that claims that the recurring boom and bust of the Valley is somehow the Federal Reserve's fault. His only backup for this claim is a link to this article about the dangers of inflation, and the Wikipedia entry on the Fed itself. If you read the inflation article, you'll note it is from during World War II. While it rightly claims that inflation itself can be bad, the purpose is to support higher taxation and government borrowing during the second world war, not to talk about Fed policy in relation to economic bubbles. I'm not defending the Fed as perfect, the Wiki article has a whole list of criticisms, but I would ask what the better alternative would be... both to the Fed itself and (mild) inflation. The Gold Standard has been tried and found wanting, for numerous reasons. (The first link by a conservative writer, the second, by a liberal one, in case you think I am politically biased.)

Anyway, the point is that I'm confused at how the bubbles in the Valley (plural because maybe one is happening now, maybe not, time will tell) are the Fed's fault. There have been economic bubbles throughout history (South Sea Bubble, etc.). They always happen when what is normally a process played out by a small percentage of the economy (starting and funding businesses) gets popular and the rest of the economy tries to participate. Suddenly you have way more money (everyone is trying to fund small businesses and get rich) than you have startups (why come up with an idea and start your own company when you can just throw your money at someone else's Sure Thing™?).

After the bubble burst in 2000, the rich people that fund the VC firms and bought ridiculous IPO shares pulled back. They didn't pull back because it made economic sense, they did it because all the other rich people were pulling back. Markets are fickle and, much like high schoolers, move as a herd. It took a couple fantastic successes to get everyone on the bandwagon, and a couple fantastic failures to scare everyone back off it.

Here is my alternative explanation for why bubbles occur. No offense to the author of the other post, but I don't think it's due to inflation at all.

When dot coms (or Web 2.0) get popular, money comes flooding in to fund them, in the hopes of hitting the next Microsoft or Google. The thing that creates the bubble is that the number of startups doesn't increase proportionally to the money supply. There is a lag. In order to put all this money to use, everything under the sun gets funded. This is why people get money for doing nothing, as the post author claims. It's not because the Fed maintains a policy of low inflation. It's because you have too many dollars (that were probably up until recently chasing opportunities in the housing market) flooding into too few businesses.

In this case, supply creates demand. Funding becomes easy, even if you are creating no value for anyone. So, anybody with dollar signs in their eyes and a copycat idea gets funded (think Pets.com here). Of course, eventually one of these companies that is funded by easy money but has no profit potential fails as it should, and people start examining their own holdings. Maybe a couple more go down in flames, and suddenly startups look risky. Now our famously fickle investors want their money back before the next failure happens to be one they invested in. They try to dump their startups to acquirers or the IPO market. Above all, they tell themselves they will never get suckered in by dot coms and investing fads again. (Of course, two years later they create the housing boom by speculating in residential real estate.) In the sudden money vacuum, good startups get hurt because they can't find funding. The situation has reversed and now there are too many startups chasing not enough money.

My point is, the Fed has the power, and sometimes (as in the case of the housing boom/bust) the dubious honor of helping or exacerbating the boom/bust cycle. They can try to deflate bubbles by tightening up money, sucking away some of that extra funding. They can try to prop up markets by flooding the market with liquidity and cheap rates to keep people/companies spending. The thing they don't do is create the bubble to begin with, nor create the bust that invariably follows. The blame for that rests squarely on the herd mentality investors have, and the willingness of Pets.com and the like to take advantage of it.

Top 10 Dead Technologies

So YC News (or maybe it was Slashdot) had a link to the Top 10 Dead (or Dying) Technologies. Lo and behold, check out number 5 (I'll even save you the clicking and quote it here:

5. ColdFusion

This once-popular Web programming language -- released in the mid-1990s by Allaire Corp. (which was later purchased by Macromedia Inc., which itself was acquired by Adobe Systems Inc.) -- has since been superseded by other development platforms, including Microsoft Corp.'s Active Server Pages and .Net, as well as Java, Ruby on Rails, Python, PHP and other open-source languages.

Debates continue over whether ColdFusion is as robust and scalable as its competitors, but nevertheless, premiums paid for ColdFusion programmers have dropped way off, according to Foote. "It was really popular at one time, but the market is now crowded with other products," he says.

The real tragedy is that pretty much all my professional experience (i.e. worthy of putting on a resume) is with ColdFusion. Talk about a waste.

To make matters worse, management recently chose (god forbid they leave it up to the people actually writing the code) the only language that competes with ColdFusion in the over-engineered-stupidly-verbose-mind-and-soul-killer category: ASP.NET 2.0.

Time to put on some Incubus to make the pain go away. Anyone know how I can make $20k a year part time?

Summer Vacation

Growing up, summer vacation just meant the end of school to me. It was intrinsically a good thing, because I got to sleep in and every day was like a Saturday. Ninety Saturdays in a row. Now that I don't really have a summer vacation anymore, I have come to realize what it really was.

When you are a kid, summer is the natural demarcation point of age. Birthdays are always an occasion, but we really measured time by the passing of summers. Each summer brought the end of one epoch, and every August brought the beginning of an entirely new one. Kids can reinvent themselves over the summer. Some come back completely different. I remember a guy that used to get straight A's who came back after our sophomore year with a mohawk and a new penchant for getting high before school. I knew another guy that had piercings, tattoos, and a penchant for pot that came back after one summer with a crew cut and a new goal to be a Navy Seal. I have no idea what happened to them to affect such a change, but I'm willing to bet it wouldn't have been possible without summer vacation.

I think kids live in two entirely artificial worlds. One of them is school, with all its strange social pressures and crises. The other is summer vacation. School is a rather lame artificial world, summer is artificial only in that 'real life' sadly doesn't resemble it at all. In school, you have this contrived responsibility to do your homework and pass your classes. During the summer, however, you suddenly have a responsibility vacuum. School has its own hierarchy and social norms, while during summer vacation you only see the close friends you make an effort to see. School makes you work towards external goals (those of the teachers), while summer forces you to set your own.

Now, I wouldn't say that most summer goals are too lofty. When I was 17, I saved all summer to buy a computer. Going back further, I'd bet my goals as a ten year old were probably more along the lines of finishing my road in the sandbox or adding to my tree fort in the woods behind my neighborhood. The point is, in the absence of external goals, kids create their own. They don't stop to think about whether the goal is profitable, or even possible, or any of the silly things grown ups consider before setting out on a project. They just decide to do it.

Somehow this changes when you grow up. You wake up one day and think to yourself: "I don't want to go to work." At first, this feels kind of like school again. Who wants to go to school most days? But when you get to that point in school, you make the last push to make it to the next vacation. The thing is, work is not like school. There is no summer vacation from work. No time to check out for 90 days in a row. Even if you could just take a break from a job, it wouldn't be like summer vacation as a kid. You'd still have to keep up the house, run errands, and worst of all, pay for stuff. If you haven't experienced it yet, taking an unpaid vacation doesn't have quite the same carefree quality as a worry-free summer does.

The worst part about this is that, without a summer vacation, there is no time to reinvent yourself. To reinvent yourself, you need a break from routine. This forces you to examine yourself (usually subconsciously) and figure out what to do. When you have a daily routine, time passes almost unconsciously, and if you change at all, it's to be more like those around you. Without a routine, you suddenly have to find something to fill the time, and that something usually leads to a personal change.

Personal reinvention aside, routine also affects your goals. When you spend five days out of seven working towards someone else's goals, it's hard to justify making more of your own. Suddenly you spend time analyzing whether an idea is 'worth the effort' before you start it, and sadly, this is where most ideas die. A kid doesn't analyze anything, they just do it. A grown up wonders if it will fit in.

The point to all of this rambling is two-fold. First, if you are a student now, don't replace one routine with another. I know for most students it seems prudent to get a summer job to save up money for the coming school year, but don't do it. This is your time to be creative, to figure out what your passion really is. You can't do that if you never form your own goals and instead work towards someone else's.

My freshman year in college I got what at the time was a great job. It was the spring of 2002, and the dot com bust was in full swing. Computer Science grads were coming out with diplomas and no jobs, so I counted myself lucky to get paid to program. Granted, the language sucked (ColdFusion), and the site I worked on was neither hip nor bleeding-edge by any means. But it was a job that paid $14/hr to write code when everyone thought my field was dead. I counted myself lucky.

Looking back now, I realize how unlucky I was. Sure, returning to that job each summer allowed me to graduate without any debt, and gave me a couple years experience on my resume right out of the gate. At the time, it seemed like all upside. The downside is simply that I robbed myself of all that creative time. Three months, once a year, to both reinvent myself and work on crazy projects without a care in the world.

So, if you are a student, don't get that summer job just to fill the summer. Get that dream internship in your field if your field needs internships, but if your field is like mine (computer science), then you don't. What you need is an idea, a case of coke, and a computer. What you need is to do something you are passionate about. If the summer job at Target makes you jump out of bed every morning in eager anticipation, then, by all means, work it. But if (more likely) you are doing it for the cash, then just don't.[1]

For the non-students out there: quit your job. It's that simple, really. If you don't wake up every morning and nearly forget to shower because you are so excited to get to work, then quit going. (Or try and get a three month sabbatical if you think they'd go for it.) If you made it this far in my essay, odds are that you aren't that happy with your job. You need a summer vacation. Worst case is at the end you find a new appreciation for your job and come back rejuvenated. Best case is you reinvent yourself and at the end find a new passion. Maybe you'll start working on an idea you have always wanted to 'get around to' but haven't. Maybe you'll find out that you'd rather be in field X instead of your current one. Maybe you'll just remodel your basement. The point is, you'll accomplish something and feel refreshed. This is the the great thing about summer vacation: by the end you are new again.

Granted, you'll have to plan a bit more carefully than a college kid does. You don't have the mom and dad safety net nor the access to cheap capital (student loans). You do, however, probably have other financial tools at your disposal. Home equity, if you own a home, is a cheap source of funds if you know you can repay it later. Simply saving up three months expenses is another way. Might as well put that fat paycheck to use on something besides new cars and suits. There are small business loans if you want to go that route, and credit cards always allow you to put off expenses for a few months. Bram Cohen wrote Bittorrent while living on no interest credit cards that he maxed out in succession. If you can reasonably pay them down before the no interest period ends, this is like a zero interest loan.[2] There is no free lunch, but there is no reason you can't eat two weeks worth of dessert upfront.

Summer vacation is important, and as soon as you don't have it, you stop changing. It needs to be long enough that you can't glide through it by goofing off (you need to get bored). It needs to be totally free of routine (again, you need to get bored). Most of all, you need enough money to get through it without focusing on the money part. A little planning ahead can get you all of this, and it is well worth it.

Don't fall into the trap of thinking that summer vacation is a luxury for kids only, and if you are still in school and have it, don't waste it trying to work like a grown up. Go apply to Y Combinator or Google's Summer of Code instead. Spending years in an unchanging environment without a chance to remake yourself isn't healthy or natural, as much as cultural stigma tells us to the contrary. Do it for too long and you might never find time to grow as a person, work on that crazy idea, and chase that dream, whatever it may be. So here is to hoping you have a great summer vacation.

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Footnotes:

1. If you are wondering how to pay for all this free time and don't think your parents will spring for the idea of you not working, there are these great things called student loans that are just made to take advantage of. Everyone looks at student loans as the refuge of last resort, but I'd argue they are infinitely better than summer jobs. You get a chunk of money upfront without giving away any time in the present. It's like mortgaging your time in the future (when you trade your time for money and then use the money to pay it back). You get three months now to reinvent yourself and find a passion in exchange for some time spent paying it back later. It's a total win because the amount you borrow to live as a college kid is going to seem like peanuts by the time you get around to paying it back.

2. I got one the other day from Chase that was no interest for 18 months. The $2000 credit line will reasonably buy me two months of living, and who can't pay back $2000 in 18 months (live on it for two months, then dedicate a whopping 72 cents of every hour for the next 16 months to pay it back in time).

Why credit cards are bad (and good)

So I got this email today from Providian (provider of one of my Visa cards) about a past due payment. I, being as drewish as I am, freaked out a bit and went to check on that account. Sure enough, I had a balance that was due April 14th, that I had never paid. After seeing it, I remember getting the last payment notice. I had gone to the site to make the payment, but their site was down for maintenance, so I just decided to come back later. Of course I forgot, and it never got paid.

This is mainly annoying for two reasons. First, I made it a point of pride to never pay the credit card companies a cent in interest. I have always paid my balances in full, before the due date. To me, a card is a means of increasing my liquidity and simplifying my planning. Since they give me a month lag between purchases and paying for them, I can know ahead of time how much of my paycheck is going to be spent (since it was in the past) and can put the rest towards savings and such. It's a nice system, and has worked wonderfully for years. I only carry $100 in my checking account, for cash emergencies. The rest is in high yield savings at ING Direct at all times.

Well now I have paid a credit card company my first cent. And, since I'm so generous, I paid them 2337 more cents for letting me spend my money through their service. I guess this was bound to happen eventually.

The second annoyance is that this will probably dent my credit score for a bit. Not that I need a better score or anything... it's already in the 90th percentile... but it's just the principle of the thing. I won't be buying a car or house anytime soon, so it doesn't really matter.

Anyway, I think when I get back I'm going to take a couple cards out of my wallet. I have four, and I really don't need them all. I had two to begin with, just in case, but then I got my American Express card, which I prefer to use for the rewards points when I can. Then, before coming to Spain, I got the Chase card because of the no interest offer. I plan to use it to cover this summer when I have no paycheck and am spending money all over Europe. When I get back however, I think I'll just ask Capital One for a higher limit and cancel the others. Keeping track of four accounts is a major time suck, and really I don't need that much credit. I have enough revolving credit at this point to live on it for two years. Obviously that would be stupid, since at the end of two years I'd be paying interest like crazy, but I could do it if needed.

Anyway, I still think cards are a great way to increase liquidity and plan ahead. They are also handy for unexpected expenses. Plus, I have enough points on my Amex card at this point that I'm planning to buy computer parts with them when I get back. So they aren't all bad.