The Economy is Fine?, VC Funding Declines, Non-Negotiable Expectations

Episode Summary

Executive Summary: The episode covers the state of the U.S. economy, arguing that inflation, banking stress, and tightening credit are signs of a normal but uncomfortable cycle rather than collapse. Jim McKelvey says the Fed is handling an unprecedented post-COVID reset reasonably well, while also discussing AI regulation, VC slowdown, office real estate, Invisibly’s data-for-subscriptions model, Square’s origin, and a viral law-firm memo on workplace expectations.

Main Topics: Macroeconomy, inflation, and the Fed’s response: McKelvey argues that the economy is functioning reasonably well given the COVID-era shock, with inflation easing, jobs strong, and the Fed’s actions credible even if painful. Bank failures, credit tightening, and systemic risk: The hosts debate whether recent bank stress and tighter lending are dangerous or simply the intended effect of higher rates. McKelvey frames it as normal credit tightening rather than a crisis. Commercial real estate and remote-work disruption: They discuss office vacancy, especially in San Francisco, and whether commercial real estate losses will ripple into regional banks. McKelvey sees cyclical pain and potential repurposing of buildings. Venture capital slowdown and startup funding: VC funding is down sharply year-over-year, but McKelvey argues this is healthy discipline after a period of bad ideas receiving easy money, while good founders can still get funded. AI autonomy and regulation: The conversation turns to Auto-GPT and the rush toward autonomous AI systems, with concern that regulation is lagging and that copyright, safety, and governance norms are unsettled. Invisibly and attention/data monetization: McKelvey explains Invisibly’s model for letting users monetize their financial data or attention to pay for subscriptions, emphasizing user control and reducing reliance on paywalls. Square’s founding story and workplace expectations: McKelvey recounts how Square emerged from losing a credit-card sale and closes by reacting to a viral law-firm memo demanding extreme availability and performance.

Key Arguments: The current economy is not broken; it is adjusting after an unprecedented shutdown and liquidity injection during COVID. The Fed deserves credit because it has remained credible and does what it says it will do, even when that hurts markets. A credit crunch is not necessarily a crisis; banks lending less as rates rise is the mechanism policy is supposed to create. Regional banks and commercial real estate may get hit, but the banking system is built to absorb cyclical losses. VC tightening is a correction from an era of inflated valuations and weak business plans, and good ideas will still find capital. Auto-GPT and related tools are exciting experiments, but AI safety and governance need serious engagement before autonomous systems scale. Invisibly aims to shift online publishing toward user-controlled payment and data monetization instead of opaque platform extraction. Square came from a practical pain point: being unable to accept a customer’s payment, then building a cheap card reader around that problem.

Data Points: Core inflation: close to 5% - Used to describe inflation remaining above the Fed’s target, though cooling. S&P 500 performance: up about 7% this year - Cited as evidence that markets have remained resilient despite banking stress and rate hikes. VC funding, Q1 current year: $76 billion - Global venture funding in the first quarter mentioned as a sign of tightening. VC funding, Q1 previous year: $162 billion - Used for year-over-year comparison showing a 53% decline. Funding drop: 53% down year-over-year - Decline in global VC funding compared with last year’s first quarter. OpenAI funding share: $10 billion - Noted as more than 10% of total Q1 VC funding. Office attendance in San Francisco: around 40% of pre-pandemic level - Used to illustrate the depth of the commercial real estate downturn. San Francisco office vacancy: 24.8% - Described as the highest on record in the quoted CRE roundup. Vacant office space in San Francisco: 21.1 million square feet - A scale indicator for the office market glut. Fed region: five-state region - McKelvey notes his St. Louis Fed board oversight covers a Midwest five-state area. Square launch period: 2009 - McKelvey says Square launched around the depths of the financial crisis. AI timeline: ChatGPT launched November 30 of last year - Used to emphasize how quickly generative AI has evolved. Fed policy communication: 100% credible - McKelvey praises Powell/FOMC for consistently doing what they say.

Pivotal Quotes: "Things are fine." — Jim McKelvey: His concise framing of the economy as structurally okay despite turmoil. "What you described to me was exactly what is supposed to happen." — Jim McKelvey: He says tightening credit and bank caution are the intended effects of higher rates. "I don't know is incredibly liberating." — Jim McKelvey: His response to a law-firm memo saying ‘I don’t know’ is never acceptable, arguing uncertainty is part of building and innovating.

Implications: The episode suggests investors and operators should expect tighter capital, slower lending, and a more selective startup market, but not panic. AI and publishing face urgent governance questions, while office, banking, and fintech will keep adapting through cyclical shakeouts.