‘The Dirty Secret of Covid’: Scott Galloway on the Postpandemic Economic Turmoil

At the start of the pandemic, he began to write a book on the crises from 1945 to the present day in an attempt to explain the momentous changes in our society and our economy. Ahead of the fall release of Adrift: America in 100 Charts, DealBook spoke with Mr. Galloway about what he had discovered about America during his research and the direction he was going. think take.

The conversation has been edited and condensed for clarity and length.

Your book suggests that the depths of the recession could be a good time to launch a start-up. With all the alarm bells ringing from the markets and the Fed, should people be thinking entrepreneurially?

What the evidence shows is that now is actually a great time to start a business. When you start a business in a recession, it’s cheaper – everything from real estate to employees to technology is cheaper. It seems a bit counterintuitive, but starting a business during a recession tests the quality of the business early on. It’s like when you want soldiers who’ve fought – a business that’s starting in a recession, if it survives a recession, that kind of proves it’s a viable business. So you have the wind of recovery at your back.

And coming out of a recession, businesses and consumers re-evaluate their purchases and are much more open to new ideas and new suppliers.

Speaking of recession, what do you think Silicon Valley will look like on the other side?

What you have in a bull market, like what we’ve had for the past 13 years, is that the market has responded positively to growth and as long as you can grow your revenue at a steady rate , the market, basically modeling Netflix and Amazon, said we liked it and continued to increase the company’s value.

Now a few things have happened: when companies like Uber seem to have a hard time imagining that they’ll ever be profitable on a sustainable business – even with growth, and they’ve grown, it’s still so away from profitability – the market doesn’t like that.

Twitter has actually lost more money in its history than it has gained. And because of rising interest rates, the cost of financing – businesses that are losing money or not yet profitable – is going up because you have to borrow money at much higher rates . Moreover, the profits you anticipated in the future are discounted at a much higher rate. In some growing businesses, it costs more to fund what will ultimately be worthless cash flow. Their net worth here and now is absolutely hammered.

What do you advise these companies to do?

There is no magic wand. It is to reduce costs. They are going to have to reduce their costs and, in some cases, adopt a business model that allows them to obtain higher prices and considerably reduced costs. And, quite frankly, convincing the market that they can achieve profitability faster, because the costs of funding this path to profitability have become much higher. They must therefore show that the distance, the track necessary to achieve profitability, is shorter. They essentially have to trade off growth for a shorter path to profitability. That’s what the market tells them.

In your book, you look at how, with every economic recovery, there’s this optimism that we’re going to fix inequality. But we always seem to be short. Why?

We confuse prosperity with progress. And we have created enormous, staggering and unprecedented prosperity. I think the fallacy or the myth that we buy into—that whenever there’s economic prosperity, the GDP goes up, that’s going to translate into progress for a nation.

What do we mean by progress? I think the ballast – and this is my first chapter in the book – is a healthy and prosperous middle class. A nation’s geopolitical power, its well-being, its democratic strength, is generally a function of the prosperity of its middle class.

Now, the problem in America – and Europe does it to a lesser extent – is that America has either bought into this myth that the middle class is a natural object of a free market economy, and it doesn’t. is not the case. The middle class is an accident. It is an aberration of economics.

There is a constant notion that if the economy is doing well, the middle class will recover. It’s not true. What happens over time in all of economic history is that the rich militarize the government, lower taxes on them, resist competition – the biggest and most powerful corporations entrench themselves, and you you end up with an erosion of the middle class. You end up with income inequality. It gets worse and worse, and then the same thing happens with income inequality. The good news is that income inequality, when it reaches these levels, always corrects itself. The bad news is that the mechanisms of self-correction are war, famine and revolution.

Unless you provide and invest in a strong middle class, whether it’s minimum wage or union support or job training or access to free education or education at cost reduced, the middle class, as an entity, disappears. We fell into this notion that as long as the economy is doing well, the middle class is doing well. The two are not necessarily linked.

You were the first to warn that too much pandemic-era stimulus was having a negative impact on the economy. What should we have done differently?

We spent, at a minimum, $7 trillion – but that was nothing but a cloud cover where we threw loaves of bread and circuses to the poor so we could massively stimulate the economy. Most of the money ended up in the market, and who owns 90% of real estate stocks by dollar volume? The top 1 percent. PPP, the small business bailout, was nothing but a giveaway to the rich. Expect America’s wealthiest cohort to be small business owners. The millionaire next door owns a car wash.

This is Covid’s dirty secret. If you’re in the top 10%, you’re living your best life. Covid for you meant more time with your family, more time with Netflix – and you saw your stock pick up.

When you pump $7 trillion into the economy and then pair that with war and supply chain blowouts, it seems obvious now: we have too many dollars for too few products. And of course, the people who will be most affected by inflation are those without cushions. We have really done too much.

You have been a long-time crypto skeptic, and now we are witnessing a real crash. What do you think will happen next?

What we found was this whole mantra of a trustless economy, we shouldn’t have trusted a lot of these new players.

Even in 1999 there were plenty of use cases for the internet – you could buy CDs and books on Amazon. You could get real-time news from Yahoo. It’s harder to find blockchain use cases that impact everyday consumers. I think you’re just seeing a massive unraveling or deleveraging of the space – and I think we’re sort of in the middle of a crash that’s likely to be unprecedented in terms of the asset class.

If you look at the bubble – if you compare it to previous bubbles, whether it’s tulips, 1999 internet stocks, housing, Japanese stocks – the rise here has been more extraordinary. The momentum here makes others look sheepish or modest, which means the crash will be just as or more violent.

There will be more trials. There will be more calls for additional regulations. You’re going to see investors say, where were the regulators?

That’s the bad news. The good news is that it probably won’t have much of an impact on the real economy. Keep in mind that even though all crypto is down to zero right now, it’s still less than half of Apple’s value.

What do you think? Do you agree with Mr. Galloway’s predictions? Let us know: dealbook@nytimes.com.

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