This is a useless blog post. It won’t help you succeed with a startup. Neither will it help you invest in startups. Instead it will make a connection most people haven’t seen. It will expose who really rules the world and how startups are changing everything we know about economics. In the end, you might see the world differently.
Nine years ago the world changed. We got a new ruler.
Regime changes happen when existing power structures break down. Like the French revolution and Arab Spring.
In 2008, the financial sector broke down. In the chaos following, the new ruler came to power. The central banks. And their leaders became household names. Today, most people know of Janet Yellen and Mario Draghi.
Like any new regime, the new rulers portrait themselves as saviors. And they were.
The world was headed for a 1930s like depression. Banks would freeze our accounts. Pensions would evaporate. Governments would have broken down.
Central banks emerged from obscurity. They stepped onto the world stage to shield us from chaos and anarchy. To restore order and confidence.
People embraced the new ruler. In return, central banks quickly and decisively saved banks, companies and governments. They did so by printing money at an unprecedented scale.
So far the ECB and the FED has printed more than $4 trillion in new money. Yes, that’s a lot.
Money printing is not bad in itself. It did save us. The problem is knowing when to stop. And if history has taught us anything, it’s that regimes never step back down. Central banks are no different.
The power of central banks
Central banks have stayed in power since 2008. They have declared state of emergency and taken control of our economy. The free market has been suspended. Prices of stocks and bonds are now under central bank control.
The price of stocks and houses are at historic highs. Not because the economy is better than ever. But because Janet Yellen and Mario Draghi keep printing money.
The reason why they keep printing so much money is because their instrument tells them so.
The instrument is a thermometer. It sits in every central bank. And it measures the temperature of the economy. Or so it’s believed.
The thermometer looks like this: high inflation – moderate inflation – deflation. High inflation is bad. Moderate inflation is good. Deflation is the really bad.
The thermometer tells central banks to aim for moderate inflation (around 2%). If the thermometer falls below their target, they print money.
And money printing always works. Except for the past eight years, it hasn’t.
Instead of inflation, we see clear signs of deflation. And Mario Draghi and Janet Yellen don’t know why. So they keep printing even more money. Sadly, it’s a futile act.
But to understand why, I will take you back in time to see when the misconception started.
Classic entrepreneurs made new products
In the late 1890s, there was a farmer named Henry. The thing about Henry was that he hated farm work. So he started dreaming about building a machine that could do his job.
Henry started to materialize his dream. After a long day of farm work, he would go to his small shed to work on his machine.
Then one day it was ready. He turned it on, and it worked. Henry had built a vehicle running on a gasoline engine. It marked the beginning of his later company. The Ford Motor Company.
But Henry Ford was just one of many entrepreneurs inventing new consumer products. In fact, the following decades would see a flood of new products. Like sewing machines, washing machines, personal computers and smartphones.
The new products provided vastly better solutions to our problems than the existing products did. Cars outperformed horses. Sewing machines outperformed handheld needle and thread. And the personal computer outperformed typewriters and calculators. The inventions created entirely new product categories that consumers were willing to pay premium prices for.
A car was more expensive than a horse. A sewing machine more expensive than needle and threat. And a personal computer was more expensive than a typewriter and calculator combined. But that didn’t matter, because new categories have no existing price anchors. The inventor is free to set a high price.
In the age of product innovation, rising prices became synonymous with economic health. A healthy economic environment had rising prices. In large part due to the many new and better products being introduced on the market. In other words, the age of product innovation was a world of inflation.
New entrepreneurs disrupt industries
The evolution of entrepreneurship can roughly be summed up like this: The first generation of entrepreneurs created new products. The second generation created digital tools. But the third and current generation does something no generation of entrepreneurs have attempted before. They redefine established industries. And the change of focus matters greatly.
The highest valuated startups are currently Uber (2009) and Airbnb (2008). Both were founded in the aftermath of the great recession. And they have inspired and defined the new age of entrepreneurship.
These startups showed aspiring founders that startups can do more than just make tools. They can disrupt and redefine the very pillars of our society. Such as: transportation, housing, banking, legal processing, energy and even space exploration. These industries are so important that their institutions have (almost) become political establishments. Disrupting them is the most daunting task ever taking on by startup founders. And it’s also the most important.
But disrupting industries has a very different economic impact than creating new product categories and creating digital tools. New categories are inflationary. Digital tools increase productivity. But redefining existing industries have a very different effect. One that Janet Yellen and Mario Draghi fear the most. Deflation.
The age of deflation
When startups disrupt and redefine existing industries they are not inventing new product categories. They are reinventing the way existing product and services are being produced.
Uber fundamentally delivers the same service as taxi companies. But they have redefined the underlying infrastructure behind the service. They have applied technology and utilized excess car capacity. The result is transportation that costs half of a taxi.
Airbnb fundamentally delivers the same service as hotels. But they have also applied technology and utilized excess capacity. The result is overnight stays that costs half of hotels.
But these companies are merely the front runners of a seismic wave of startups attacking the very pillars of our economy. Startups like Impossible Foods is redefining the way we produce meat. The result will be high quality meat at a fraction of the current price. Robinhood is attacking the financial service industry and eliminating fees for trading stocks. All of these startups have one thing in common. They lower the price on things we already spend money on. And that has a name. It’s called deflation.
It’s the thing central banks fear the most. And they will fight it with everything they got. But what they fail to understand is that not all deflation is created equal.
Why deflation from disruption is different
Economic theory stipulates that deflation leads to deferred spending. If apples are cheaper tomorrow, we will wait buying them. That’s obviously bad for economic activity. But this theory builds on a critical assumption. The assumption is this: we can anticipate the price decline.
If we know that apples will be cheaper tomorrow, we will surely wait buying them. But deflation from disruption is fundamentally unpredictable.
No one saw Uber or Airbnb coming before they were actually here. No consumer thought: I will wait booking my vacation until some startup emerges that will utilize spare bedrooms to offer cheap stays.
This means that deflation from innovation won’t lead to deferred spending. And this also means that Janet Yellen and Mario Draghi are looking at an obsolete thermometer. In other words, they are dead wrong.
Disruptive startups will define our future
Central banks have pledged to keep printing money till they reach their inflation targets. But they are fighting the force of human innovation. A force consisting of entrepreneurs from across the globe hell-bent on disrupting the establishment. Janet Yellen and Mario Draghi have brought a knife to a gun fight. And they will lose.
What central banks will get instead is something worse than deflation. They will get bubbles. All the money flows into stocks and cheap housing loans. Prices on stocks and houses will detach from the true state of the economy. They will bubble up to levels so high, that central banks will have no choice but to keep them high.
Janet Yellen and Mario Draghi will find themselves in situation they cannot get out of. All of it because they don’t understand that the world has changed. That they actually aren’t in control. But that disruptive startups will define the future economy. And it will be deflationary.
- Central banks rule the current economy by intervening with printed money
- Central banks want inflation because inflation used to show economic health
- The new generation of startups creates deflation
- Deflation created by disrupting startups doesn’t lead to deferred spending
- Money printing will only lead to bubbles
- Startups will succeed disrupting industries and thus create deflation
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