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Blake Oliver: [00:02:49] Welcome to The Cloud Accounting Podcast. I'm Blake Oliver David Leary: [00:02:52] and I'm David Leary. Blake Oliver: [00:02:53] So, you're back from your California vacation, Venice Beach. How was that, David? David Leary: [00:02:57] Yeah, I unplugged for two days. I did not touch a computer, or laptop, and it was really, really hard not to, on the phone, touch Slack. It was good to get out of Arizona. Got to be in some 78-degree temperatures. It was interesting because we hung out around Venice Beach a little bit, but with L.A. being kinda shut down, it didn't have that California busy-ness- Blake Oliver: [00:03:17] Were there restaurants open? Bars open? David Leary: [00:03:18] Yeah ... Because I think the weather's nice, compared to Arizona, a lot of restaurants just set up tables on the parking lot, and people can just dine on the parking lot. It was interesting, even people that were ... Normally, you go to a restaurant, and you wait in the lobby for your table. People are just standing in the parking lots drinking. The enforcement just didn't seem to be there. Venice Beach wasn't too packed, but Santa Monica, it was like looking at Phoenix. I mean, people were just everywhere. It was packed [crosstalk] Blake Oliver: [00:03:42] Were they wearing masks? David Leary: [00:03:42] I'd say it's probably 75-percent masked. Even myself, I'd have my mask off. If I saw somebody walking down the sidewalk towards me, I'd put it back on, that type of a scenario. If you're by yourself, you take your mask off. The beach, everybody stayed pretty much spread apart. People were sitting- you could sit on the beach, but you had plenty of room. Nobody was around you for 25-30 feet. I've been to L.A. before, and when you wanna do something, you're gonna do that one thing in one day. We were able to take my daughter to the UCLA campus. We did Koreatown. We did three different stops in Koreatown. We did a K-pop store because she's into that K-pop music, right now. Then, we did ... We literally parked at the corner of Hollywood and Vine, street parking. Everywhere we went, we had street parking for two bucks. Blake Oliver: [00:04:24] Wow! David Leary: [00:04:24] We knocked out like six things in the city of L.A. - Rodeo Drive, everything - in a four-hour timeframe because there was no traffic. Blake Oliver: [00:04:32] That's amazing. David Leary: [00:04:33] You could just do anything you wanted. It was really like ... If you had to go visit L.A., do it now because nothing's busy. Blake Oliver: [00:04:38] Good tip! David Leary: [00:04:38] It's easy to get around. Blake Oliver: [00:04:39] That's great. Well, I was here in Arizona, in Scottsdale, in my new home, and I experienced my first monsoon. David Leary: [00:04:47] Yes! Finally, it's raining here- Blake Oliver: [00:04:49] Now, I should qualify that by saying it didn't actually rain on our place, but the huge thunderclouds came overhead, and I've never seen anything like it. They're flat on the bottom, like almost completely flat, at least these ones were. I think it has something to do with atmospheric pressure. Anyway, there was dust; there was wind. It didn't actually rain right over us- David Leary: [00:05:10] The haboob, right? Blake Oliver: [00:05:10] -and we had the most beautiful sunset I've ever seen afterward. But, yeah, it's interesting; in L.A., the clouds just come over and they just blanket the city. You don't get patches of sky and cloud. So, I feel like we have more nature here, in a way, in the desert. Also, I saw an article about how coronavirus is going in Arizona. I could not believe this. You know that I'm not a big fan of lockdowns. I mean, part of the reason I moved from California to Phoenix is because I was not optimistic about how the state was handling lockdowns. I have a kid in school, and my wife, and I both work, and we wanted to continue our lives. We couldn't imagine spending the next year in a form of lockdown and not having the schools open and all that. [00:05:55] The New York Times is reporting- the headline is: "What Arizona's Tenuous Coronavirus Plateau can Teach Us," seeming to acknowledge that this staying open with reasonable restrictions and wearing masks is working in Arizona; at least the last few weeks are showing that. We didn't hit 100-percent ICU capacity. We just grazed it, like 80-90 percent. Everybody's wearing masks because the vast majority of people in Arizona live in two counties that have implemented mask requirements, and it's working. Restaurants are open, people are wearing masks, people are going out shopping. It can be done. It doesn't have to be this politicized, partisan issue, where it's one or the other - either we're all open, and we're all just gonna get COVID, and we just accept that ... That's not realistic/reasonable. Also, just locking down and staying at home until this goes away is not either. David Leary: [00:06:47] Yeah, I've switched my focus just to focus on Pima County, where I live. I watch the numbers every day, here. It's trending down again. I always thought this in the beginning - we'll figure out the balance. For lack of a better word, it's not supply and demand, but it's like risk/reward. It'll start to climb too high, and people will scale back their activities. Then, it'll start going down, and people will feel comfortable and go out. It's probably gonna find this magic flat line. It's very clear, also - I was looking at the graphs this morning. I was thinking about this ... It's coincidental that we both were looking at this ... We actually, in a weird way, as a society, can control the graph now. Blake Oliver: [00:07:23] Right, yeah. David Leary: [00:07:23] It's happening naturally based on people's individual actions. On the whole, that's affecting the graph more than anything, probably. Blake Oliver: [00:07:31] That's the thing. Personal responsibility is far more important than government mandates. Like you saw, if people don't want to obey these rules, there's no way for the State of California to enforce it. So, it's about getting people to do this. I feel, as accountants, we're in this interesting place because we are small business owners ourselves; we have clients that are struggling, and we want them to succeed. We want to balance the economy with public safety, and there are ways to do this. It doesn't have to be Republican versus Democrat, liberal versus conservative, libertarian versus authoritarian. We can make sensible decisions. David Leary: [00:08:13] The free market's figuring it out, right? It's coming into balance on its own. Blake Oliver: [00:08:18] I've got more stories about the pandemic and about the stimulus and shifting into the accounting news, I know you have a big story about ScaleFactor; follow-up on that- David Leary: [00:08:26] ScaleFactor, yep. Blake Oliver: [00:08:29] I have some listener feedback on our last episode, and a bit of nerdy Modern Monetary Theory economics to talk about. Did I mention stimulus? I think I did. David Leary: [00:08:39] Yep, stimulus. Blake Oliver: [00:08:41] So, I just wanna highlight this right now. The big news ... As we record, it's July 25. The $600 federal unemployment bonus amount is expiring at the end of this month, so there is a ton of pressure in Congress, right now, to make something happen. What's crazy is that the Republicans don't have a plan yet. It's been delayed now, until Monday. It's Saturday as we record, so Mitch McConnell is apparently going to have some sort of plan on Monday for the Republicans to look at. It's a counter to the Democrats' plan. David Leary: [00:09:11] Last week, we said next week, we'll be talking about some announcements for stimulus, and it kind of stalled this week. Now you're down to ... What do you have? Monday, Tuesday, Wednesday ... Blake Oliver: [00:09:24] They do not have a lot of time to get this done, and it's putting the Republicans at a disadvantage. There was an article in Accounting Today. Headline is: "McConnell's Stimulus Waiting Game Turns into a Race Against the Clock," kinda highlighting how waiting until the federal unemployment benefit ran out is probably not the best strategy, because what's going to happen if it runs out, and they don't have a deal? Republicans are gonna get blamed for it. This is critical stimulus for millions and millions and millions of people who are out of work. I just think, like politically, letting it expire completely is just not an option. Yet, the Republicans don't have agreement internally about what to do. The White House is still proposing this ridiculous plan that apparently nobody cares about other than them, which is the payroll tax cut. David Leary: [00:10:10] I think I saw an article here on PYMNTS.com that the GOP and the White House have agreed on a plan now. So, the White House is kinda ... Basically, the Donald Trump payroll-tax thing is not gonna make it. Blake Oliver: [00:10:26] Right. Yeah, that was never even close to being in the plan. David Leary: [00:10:31] That's part Mnuchin, but they do favor a stimulus check. They just don't know how. There's no details on it. They also are leaning against doing unemployment for the extra 600 bucks, and they're thinking if there's some way to do like a 70 percent of your income type of a thing. You're right, it's great. Nobody knows what's gonna hit the table. I think, if I understand it correctly, the GOP is like- they wanna do a trillion-dollar package for CARES Act 4.0, as they're calling it ... My understanding is the Democrats are still pushing for a $3 trillion or $4 trillion package. Blake Oliver: [00:11:01] Yep, $3.5 trillion, something like that. It's a lot more. There's a great article on Reuters summarizing what Democrats and Republicans want in the next coronavirus relief package. That's actually the title of this story: "What Democrats and Republicans Want in the Next Coronavirus Relief Package." This was written on July 22, so it's a few days old. Hopefully, things haven't changed too much. I can just highlight what they agree on, what they disagree on. Republicans and Democrats agree on direct payments to Americans. As you said, those $1,200 stimulus checks, where you get another, I think, $500 for a child. That's gonna happen. It's most likely gonna happen where the IRS is gonna send out those checks. It makes sense because the IRS has already got the systems in place to do it, right? David Leary: [00:11:44] I still haven't gotten mine. I need to track that down. Blake Oliver: [00:11:47] Apparently, like 12 million people have still not gotten their checks, so that's an issue. Aid for school: both sides are backing roughly $100 billion in support for schools and universities. I think that makes total sense. If Trump wants to reopen the schools, he'd better give them some money so that they can do this safely. That's reasonable. I think that's a compromise we can all agree on. Health spending: more money for hospitals and healthcare providers to treat those sickened by coronavirus. The Trump administration initially opposed money for testing, but now supports it. Duh ... I think that's important. Both sides want to bolster the Paycheck Protection Program and do a number-two round of that. [00:12:26] What do they disagree on? Liability protections. That's a big one. Republicans wanna shield businesses and other organizations from personal injury lawsuits related to the virus, and Democrats oppose those protections. I don't know how you feel about this, David, but I've been to a few businesses. I went to get my teeth cleaned at the dentist's, and I had to sign these ridiculous forms saying that I hadn't been around anybody. I hadn't been exposed to coronavirus - basically just another waiver that ... Like when you go skydiving, you have to sign this giant form saying you're not gonna sue them and all that stuff. I feel like it is unfair to ... We are in such a litigious society here that if we don't do something about liability, it could be really bad for businesses. David Leary: [00:13:07] Oh, I think this fully is the reason Intuit, Google, these massive companies, are having a no-travel policy for their employees, and they're not requiring them to come to the office because it's a eliminating the liability. Blake Oliver: [00:13:18] Right. David Leary: [00:13:18] Nobody can say, "You made me go to this conference," or "You made me get on that airplane flight." Then, on top of that, I think once you have a company of 10,000- 40,000 employees, you probably constantly have somebody who has COVID, as well, right? I think a lot of it's just driven by the- it's legal, what's driving that. They'd much rather their employees come in. I have some stats we can get into about- working from home stats. People are starting to get- they're done with it. Blake Oliver: [00:13:40] Oh, yeah. People are getting tired of it. We're starting to see the backlash. Those are the big ones. Payroll tax cut, I mentioned; nobody's interested in that except the White House. Then, Democrats just have a ton of other funding - U.S. Postal Service, the elections, food assistance, transit systems, student loan relief - quite a range of programs. Republicans just wanna focus the bill on COVID, directly. That's what's going on with stimulus right now. Again, not that much to report. Hopefully, in our next episode, we'll have an actual bill or a proposal to talk about. [00:14:10] Something related - state CPA societies, and the AICPA are calling for federal relief for state and local governments amid the coronavirus. This is something that has also been a sticking point - actually a nonstarter, really, with many Republicans in the Senate - bailing out, basically, the cities, like New York City, that had to spend a lot of money to fight this thing. I think that's gonna change. As we see, the virus is moving inward into smaller cities. Florida is being hit all over the state, right now. I think you're gonna see those senators change their minds on bailouts, once those local areas that are more Republican leaning start to suffer and can't afford to pay their bills. David Leary: [00:14:48] So, states like, for example, South Dakota, where they're just like, "Oh, we've won this ... We've done so well. We never locked down ..." Eventually, it's going to get there, and their opinions are gonna change, and the way they pass legislation is gonna be affected- Blake Oliver: [00:15:02] Yeah, I think so. David Leary: [00:15:03] -based on the impact in their own states. That makes sense. It makes a lot of sense. Have you been keeping up with the whole PPP loan forgiveness stuff? Blake Oliver: [00:15:09] So, I saw that the AICPA released a loan forgiveness tool. This is at PPPforgivenesstool.com. It's powered by Biz2Credit. AICPA, in partnership with Biz2Credit, created this online form. It's available to any business, any CPAs. You can fill out the application online, and the tool produces all the forms that you need to submit for forgiveness. David Leary: [00:15:31] Yeah, and the AICPA, they're really marketing this and pushing it hard. They really are. It's all over social media. I'm constantly seeing it come through my feeds, but I'm also seeing from the AICPA, they've had these webinars, and they're telling people: don't apply for forgiveness yet. Wait; just wait; just wait. I feel like the AICPA is sending out a mixed message here. Should people use your tool and apply for forgiveness or should they just wait? Blake Oliver: [00:15:51] Well, and I'm not really sure, what is the relationship here with AICPA and Biz2Credit? Why did the AICPA create a tool that is available to every small business and non-AICPA members? Luke Templin (@luke_templin) on Twitter said, "@DavidLeary @BlakeTOliver, did the AICPA just miss out on an opportunity to add more members or add more value to their current members? I would have considered rejoining to have access to the #PPP forgiveness tool." So, by giving it away to everybody, did the AICPA just reduce value for its members? David Leary: [00:16:25] So, a small business owner now could just Google- find that tool because it has a great domain name. They find the tool, and they just do it there, and then they don't hire their accountant to do this for them. Blake Oliver: [00:16:34] Right. I think the AICPA should be focused on creating tools for its members, not potentially taking work away from them. It's strange. David Leary: [00:16:42] Yeah. It's a confusing message. They're doing a good job marketing it, though. It's a good domain name. Blake Oliver: [00:16:49] It is a good domain name. What else do we wanna talk about? I think that's all I've got about PPP stimulus. David Leary: [00:16:56] You had a PPP article about your stripper stimulus. Do you wanna touch on that? Blake Oliver: [00:17:00] That's a good one. So, I just thought this was another- this is a funny article. Clearly, the reporter had a good time writing this. It's a Reuters story. The headline here is: "Strip-club stimulus reveals lingering uncertainties over U.S. small-business aid." The opening is just quite good. Let's see ... "Backlights off, music quiet and poles bare, strip clubs across the United States closed earlier this year in the face of COVID-19 social-distancing measures that precluded the up-close nature of the exotic dancing industry. Like many businesses, these cabarets, lounges, and gentlemen’s clubs hoped a $660 billion Small Business Administration (SBA) loan program would help them weather the lockdown. But nearly four months since the launch of the loan initiative known as the Paycheck Protection Program, it is still unclear whether the SBA can make it rain for them." David Leary: [00:17:48] Oh, boy ... Is the problem, if I remember correctly, that when they created the PPP structure, and the SBA loans, certain types of businesses can't get them? Blake Oliver: [00:17:59] This was the Trump administration. Trump administration put this in the PPP bill. "Companies that present live performances of a prurient sexual nature are precluded from participating." So, there's a question as to what is prurient? What is a performance of a prurient sexual nature? Does that include dancing? There's a variety of levels of undress. So, this is now going through the court system. Just like all of the tax issues when it comes to these kind of businesses, it can be a little bit entertaining. So, clubs have sued, and two federal judges have rebuked the SBA for excluding the establishments from receiving the forgivable loans. David Leary: [00:18:37] The SBA had a previous policy that restricts organizations, for example, churches and strip clubs, but when they passed PPP, apparently houses of worship got an exemption in the normal rules. Blake Oliver: [00:18:48] Yep. David Leary: [00:18:48] But the whole point of the PPP is the Paycheck Protection Program- if those people are getting paychecks, if it's a business giving paychecks, I just ... Blake Oliver: [00:18:56] Right. If it's a legal business- this is a business that is allowed to normally operate, but for some reason, they are excluded from the program? That just seems unreasonable. We should be excluding illegal businesses but not legal ones, regardless of what you think of them. David Leary: [00:19:12] Yeah. If they have an EIN numbers, and they're paying taxes- Blake Oliver: [00:19:13] Yeah, let them in on it, right? David Leary: [00:19:16] -and filing payroll- 941s. Blake Oliver: [00:19:18] This has an impact on the workers there, like you said. Jordan Lawrence is a dancer who was interviewed in this story. She lost her job in insurance during the pandemic, and returned to her former profession as a dancer a few weeks ago. Even though she had saved up for years, she struggled to pay her bills without her old job. Lawrence said she is frustrated the SBA is squeezing her industry just as she is getting back on her feet and the stage. "These people need to come out here and interact with people like me because they are interfering with our livelihood. We have bills to pay, too." David Leary: [00:19:46] Let's transition from that to working at home. Blake Oliver: [00:19:49] Yeah, we may have spent a little bit too much time on that [crosstalk] David Leary: [00:19:51] It's the fundamental nature of it. It goes back to the fundamental basic problems with the PPP. It's called the Paycheck Protection Program to protect people from getting laid off, and it's gotten- everybody skewed it to their own definition of what that program is. Blake Oliver: [00:20:07] Yeah. David Leary: [00:20:07] It's gotten so far away from what it was designed ... How many weeks now? It feels like a year ago, but we're at week [crosstalk] Blake Oliver: [00:20:13] The time is irrelevant. There is no ... David Leary: [00:20:16] Sometime in 2020 ... That's how we'll summarize everything. "Back in 2020 ..." Blake Oliver: [00:20:20] The first year of quarantine ... David Leary: [00:20:22] Maybe these strippers could work from home. I don't know. Is that even possible? I can tell you- Blake Oliver: [00:20:26] Well, actually- David Leary: [00:20:26] Do you have a work-at-home article about this? Blake Oliver: [00:20:29] -there has been an actual humongous uptick in "camming" - these kind of performances on a webcam and people pay. So, instead of going to a club, you can now watch somebody dance on a camera from the comfort of your home and social distance. So, now you have all of these people working from home, too. Just like accountants are working from home, we have dancers now all working from home, too. The whole economy has shifted to work from home. I think that's a great transition to the remote-work topic. David Leary: [00:20:59] Journal of Accountancy had an article about why Zoom meetings really leave you exhausted. Blake Oliver: [00:21:03] Yeah, and I feel this. I don't know about you, David, but if I'm on Zoom for more than a few hours a day, I get a little weird. David Leary: [00:21:10] Oh, I'm not kidding ... I'm only gonna do Zoom calls three days a week, possibly. I cannot ... It's just killing me now. I'm probably on Zooms now, eight to 10 hours a day, five days in a row. You could tell, for us, we used to record the podcast on Friday evenings. I physically text you on Friday afternoon. I'm like, I physically cannot do another ... I cannot get on with you, Blake. Let's push this out to Saturday morning- Blake Oliver: [00:21:35] Because you're tired, yeah. David Leary: [00:21:35] It's affecting our podcast. I'm physically and mentally exhausted from doing Zooms. Blake Oliver: [00:21:40] So, what's the reason that Zoom is exhausting? David Leary: [00:21:42] It's techno stress, right? Blake Oliver: [00:21:46] Techno stress? David Leary: [00:21:46] Techno stress. It's a lot of things, I think, with working at home. It's hard to use these tools in a healthy manner that balances personal and professional. If you think about your warm up to the day, before, you'd eat breakfast, take a shower; you could do all those things. Now, you're waking up, and you start a Zoom call. There's no boundary. I think that's part of it. Then, the physical part of it, different people have different quality of audio. You and I would go out of our way to make sure we have high-quality audio because it's physically exhausting to listen to poor-quality audio. Blake Oliver: [00:22:19] Yep. David Leary: [00:22:19] I guarantee you every Zoom meeting you're in, most people do not have a high-quality audio connection. Blake Oliver: [00:22:25] Yeah, and you can really tell when somebody invests in like a good microphone, and there's no feedback. It makes a big difference. David Leary: [00:22:31] Yeah. On top of that, they're saying it's exhausting to watch The Brady Bunch view, where you have the table, and you have everybody's teeny little head on all those things. Blake Oliver: [00:22:40] Because you're trying to focus and see what's going on with all of them at once. You can't ... It's really hard to do that. I turn that off. I just look at the active speaker at a certain point- David Leary: [00:22:51] I'm always trying to figure out who's speaking ... You can't find out. So, there's that going on, but I think, in general ... There's a bunch of articles I saw this week about people wanna return to physical workspaces. They're working too many hours now. There's statistics about people do- staff does worse when working from home if people aren't checking on them. Blake Oliver: [00:23:10] Yeah, there was a story in The Wall Street Journal: "Companies start to think remote work isn't so great after all." It's basically that idea that the productivity that we saw right after the pandemic caused everyone to start working from home, that was due to people being afraid that they might lose their jobs. So, everyone's just hustling at home, trying to get a bunch of work done. We all were like, "Oh, wow, remote work works!" because we're all being productive at home, but that was a temporary- at least, that's the gist of this story. [00:23:38] Cracks are emerging; projects taking longer; training is tougher; hiring and integrating new employees are more complicated. Now, this is all anecdotal. I don't think there were any studies done of this yet, but it will be interesting to see if the studies that do inevitably follow back up that long-term remote work is more challenging than we thought. David Leary: [00:24:01] I have some stats about remote work from three different studies that just give some insights to where I think we are, right now, in this work-from-home thing. I know that I'm personally- I'm feeling trapped. I can't go to Starbucks ... I've worked remotely, and that's the difference, I think. Working remotely and having freedom to go to a Starbucks, or anywhere you wanna work, where I can take my backpack and work is much different than being locked in, forced to work at home. Blake Oliver: [00:24:24] 100 percent. I used to get out every day. I would go have breakfast, I would go have coffee, I would go out to lunch. I made sure that I got out. I rode my bike. I was always out and about, even though I was working from my apartment. David Leary: [00:24:37] Let me jump into some of these articles. This an article on CFODive.com. "Staff do worse when asked to report frequently, accounting study shows." This is actually specific about accounting review. Staff were frequently asked to report on their progress ... Basically, Blake, I hit you on Slack every hour: "Is that project done? Is this done? Is this done?" Staff who frequently are asked to report on their progress, perform their work more poorly than staff who aren't subject to the same reporting requirements. Blake Oliver: [00:25:03] By reporting frequently, you mean, my boss says, "Every day, when you get to work, tell me what you're gonna work on. Then, every day before you log off, tell me what you did." David Leary: [00:25:12] Yes. If you're being micromanaged, you're gonna be less productive. Blake Oliver: [00:25:16] It makes sense, right? It would be kind of stressful, too, to have to do that every single day. David Leary: [00:25:22] There's another article on Smallbiztrends.com: "66% Working from Home Say They're More Likely to Work Nights and Weekends." It just goes through that. Blake Oliver: [00:25:29] Yeah, absolutely. David Leary: [00:25:31] 19 percent of home workers, they're starting their day earlier and finishing later because of the quarantine. Blake Oliver: [00:25:37] Mm-hmm. David Leary: [00:25:37] So, you probably used to have a 9-to-5 job, where you spent an hour on both ends commuting. Now, you're just filling that with work. Blake Oliver: [00:25:43] Well, work expands to fill the time you allocate to it, right? That's the classic phrase. So, if you have no boundaries between work and home because you're always at home, then you'll just work all the time. David Leary: [00:25:54] Yeah. This was a survey of 2,000 Americans that typically work in offices but now have been working remotely because of the pandemic. So, I guess you and I probably wouldn't fall into that, in this survey, but less than half of them - 49 percent - said they feel their boss trusts them when working from home. Blake Oliver: [00:26:10] Less than half. Wow. David Leary: [00:26:10] Less than half. About 43 percent think their bosses trust them, for the most part; seven percent believe their employer does not really trust them at all. Blake Oliver: [00:26:19] I have a theory about this whole remote-work experience- experiment, if you will ... Which is that what it is revealing, that is causing stress for both managers and employees, is that we are actually really, really unproductive going to an office every day; that the amount of work that you actually do is not that much. Studies bear this out. We've talked about this in the past on the podcast that most knowledge workers do four hours of work a day and the other four hours in the office is wasted. The office experience hides that. It masks that because you spend time at meetings, you're walking around talking to people. You feel like you're getting a lot of stuff done, even though you're not, when you actually measure it. Then, when you take away the office and all the trimmings and trappings of that, and you sit at home, you're only doing like four hours of actual work, and you feel really unproductive, and you feel crappy about yourself, and your boss is wondering what the hell you're doing all day long. David Leary: [00:27:17] Then, on top of that, going to meetings physically is not as exhausting as all these Zoom meetings. Then, you're beating yourself up because you're just like, "I didn't get any work done, but I can't even bring myself to try to do some work because I'm so beat up. Blake Oliver: [00:27:29] Well, because meetings, most of the time, aren't actual real work in an office setting. You're not actually accomplishing anything; you're hanging out in a lot of cases. David Leary: [00:27:38] I have another survey that's also on Small Biz Trends. This is: "Employees Want to Return to a Physical Workplace." This is from a survey done from some company called Hibob. This is another 2,000 people they've surveyed; different survey, though. 36 percent of employees prefer to work from the office. 43 percent of employees would like to return to the office once or twice a week. Only 21 percent of employees actually work from home- Blake Oliver: [00:28:02] Want to work from? David Leary: [00:28:03] Yeah, regularly. So, people want some balance. I think a lot of this is it's freedom ... I wanna be free from being micromanaged. I want the freedom to be trusted that I'll work correctly, and I'll get work done when I'm at home. I also want the freedom to go to the office. I want freedom to work ... It's coming down to an almost full circle- swinging back the pendulum to what you started, about this balance of being locked down versus the risk of COVID. Right now, the work-from-home shift swung way too far the other way, and now the balance is gonna have to swing back the other way. It's just gonna have to; people are gonna have to have some options to go work in an office for part time, some part of the day. [00:28:45] This article actually has some tips in here, as well, on ways you can prepare your office. Using a guideline - CDC or your local government's providing - you wanna disinfect and remap your seating arrangements. I've heard a lot of companies that are doing- swapping days. There's a sign-up form, and only 10 people a day can sign up, then come into the office. You can't have 30 people in the office, but you can have 10. So, there's ways for companies to do this and get this balanced. But, yeah, it swung too far the other way, and people are gonna start rebelling against it now. I mean, it's human nature. We just can't be locked down like this. Blake Oliver: [00:29:16] We're social animals. We need to be together for a certain amount. But there's a compromise. Again, going back to the theme at the beginning of this episode, it's not one or the other. Perhaps there is a happy medium.
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Blake Oliver: [00:30:12] Should we talk about ScaleFactor- David Leary: [00:30:13] Yeah, let's jump into ScaleFactor. Blake Oliver: [00:30:13] -I feel like that's the elephant in the room. David Leary: [00:30:15] It's massive, massive, massive. So, I think we talked about ScaleFactor two weeks ago? Blake Oliver: [00:30:21] Two weeks ago. Yeah, I thought this was all gonna be over. Then, Forbes came out with this story you've brought this week that just is like an exposé on a ScaleFactor and what went down there. So, perhaps you could summarize it for us. David Leary: [00:30:34] Yeah, so, it was two, three weeks ago- three episodes ago, ScaleFactor announced they were shutting down. We talked about that then. So, ScaleFactor, those of you, if this is your first time ever listening to our podcast, and you've never heard of ScaleFactor, ScaleFactor is one- I like to call it ... It's an accounting or bookkeeping firm with engineers. Blake Oliver: [00:30:50] VC-funded. They had raised $100 million dollars in a year to disrupt bookkeeping. David Leary: [00:30:58] I'll put links to some of our old podcast episodes, where we have talked about them because we've questioned the numbers a lot ... What are you doing with that $100 million? When they've come out in their press releases, they said, "We only have 500 customers ..." or 750 customers. The math never worked. It never made a lot of sense. Blake Oliver: [00:31:16] The fundraising rounds kept getting bigger and bigger, and we weren't seeing the results. We've been following them since they were like a Series-A company. First, they raised $10 million; then, not that long after, they raised $30 million. Then, not long after that, they raised $60 million. David Leary: [00:31:28] The reporter that released the Forbes article about ScaleFactor shutting down three weeks ago, and it was all blamed on COVID, he actually ... I talked to him. He actually called me for an interview. Blake Oliver: [00:31:39] This is David Jeans? David Leary: [00:31:42] David Jeans. Yes. Blake Oliver: [00:31:43] David Jeans. David Leary: [00:31:43] I don't have any dirt other than only from our perspective of ... Anything we've [inaudible] I've cited some of the links to the podcast ...I think, for you and I, what we bring to the table is we have this perspective because he didn't know these other companies existed, like TaxVisor, who we've talked about. That was a few months ago. Blake Oliver: [00:32:03] Visor, yeah. David Leary: [00:32:03] Visor, right. They promised to do everybody's taxes, and they didn't file people's tax forms ... This combination of tech and a service. We've talked about this a lot over the last 18 to 24 months, on the podcast. I gave him some of those insights just from an industry perspective, where things are at. I actually invited him to come on the podcast because he said, "Oh, yeah, there are some other things going on I'm chasing down, from a story perspective." He didn't leak. He wouldn't give me a bite. Nothing. Now, I know why because this week, he dropped a major scathing article about ScaleFactor. Blake Oliver: [00:32:34] Yeah. You mentioned this just a moment ago, that ScaleFactor - Kurt Rathmann - blamed COVID-19 on ScaleFactor needing to shut down; that COVID hit; they lost 50 percent of their clients; therefore, there was no path to profitability, and they decided to shut down and give the money back, that was left, to the investors. David Leary: [00:32:58] Yeah. Maybe we should just go through this article a little bit. I have not highlighted an article 20 times, since Visor Tax, when I chased down that story. There's just a lot here to unpack and we can just kind of go through it, highlight by highlight. We can talk through it. To summarize our conversation last time, you suspected that the VCs, they didn't see the numbers they wanted, so they pulled their money out. You were thinking this is the VCs' fault. They got scared. They thought there was an easy out, and they pulled their money back because they just wanted to save what they could of their investment. Blake Oliver: [00:33:27] Yeah, and after the $60 million investment, I would be surprised if they didn't have control to do that. It'd be crazy to give $100 million dollars to this startup and not be able to take it back if you wanted. David Leary: [00:33:38] My take, at the time, was like, I'm not really surprised by this, because remember we talked about how, at QuickBooks Connect, they rented a booth, and they never showed up the first day. They just had a bunch of cardboard boxes sitting there. There were just these little- I keep calling them half-assed signs that the boat wasn't right. There was just little signs. If you step back and watch it over the past year, you could ... A lot of things did not make sense, behavior-wise. Well, this article- let's go through it, line by line, because there's a lot of really shocking things in this article to talk about. Blake Oliver: [00:34:04] Give it to me. Give it to me. David Leary: [00:34:05] Basically, the gist of it is many customers started to find out, and these were like ... Like a café, it's like a coffee shop. They're starting to figure out that instead of producing financial statements, they basically found out that it's not AI or software doing it, it's dozens of accountants doing it manually- Blake Oliver: [00:34:20] In The Philippines. David Leary: [00:34:22] Then they found out it was in The Philippines, as well. It's kind of similar to what we discovered three years ago, or two years ago, with Botkeeper. It wasn't made very forward what was happening with that. Blake Oliver: [00:34:33] Well, it was explicitly sold as this amazing software that does your accounting for you. David Leary: [00:34:40] Yeah. Blake Oliver: [00:34:40] And it wasn't. Hardly any of it was, right? David Leary: [00:34:44] Yeah. Then, ultimately, a lot of customers are saying they received their books filled with errors and then they had to rehire other accountants or clean up the mess themselves. To summarize this, not only were they not delivering on their software promise, they actually sucked at just being a bookkeeping firm, as well, apparently. Blake Oliver: [00:35:05] It kind of makes sense. They're software developers trying to do accounting- be an accounting firm. It couldn't be more different. David Leary: [00:35:12] Yeah, and getting down to the gist of this article, it talks about this whole- that mindset of "fake it til you make it." VCs are wanting to throw money at these companies until the product comes up to expectations. Because of that, that causes these companies to just use super-aggressive sales tactics, and chase capital- Blake Oliver: [00:35:29] Like you said, the Facebook ads that they must have spent millions on, potentially [crosstalk] You saw them everywhere. David Leary: [00:35:37] Everywhere, yeah. Constant Facebook ads. Blake Oliver: [00:35:37] They were going after small accounting firms, like Cruze Consulting, and targeting them with ads, trying to steal their clients. David Leary: [00:35:45] Or like we talked about that last week or a couple weeks back, when we talked about ScaleFactor, they were going after Acuity. They were really hammering ... Creating this impression ... They were chasing revenue and putting all their efforts into selling a product instead of building the product, and it catches up. This is a quote that was from some accountant that remains unnamed. "That's what I found out. ScaleFactor is pretty much a glorified bookkeeping firm," says one accountant who, like other former ScaleFactor employees that spoke to Forbes, asked to remain anonymous because they signed non-disclosure agreements and feared retaliation from the company. When I read that, you know what that reminds me of? Blake Oliver: [00:36:23] What? David Leary: [00:36:24] Elizabeth Holmes and the- Blake Oliver: [00:36:25] Theranos. Yeah. David Leary: [00:36:26] This intimidate your employees and customers, as well. Blake Oliver: [00:36:33] Before we get to the customers, you mentioned the outsourcing thing. I think this deserves a little more emphasis. Not only was ScaleFactor not using AI/machine-learning software to do the bookkeeping, they were using accountants and bookkeepers - people - to do it and kind of selling it as software behind the scenes. They didn't even have their own outsourcing operation. They outsourced that to a company called The Outsourced Accountant, which is a firm that specializes in offshoring in The Philippines. David Leary: [00:37:06] TOA Global - they have sponsored the podcast. We know the TOA Global team, and this doesn't make them look good now because essentially the tool is glitchy and it couldn't be relied on to accurately sort transactions. Then, ScaleFactor's like, "Let's hire our own in-house accountants and bookkeepers," and then, apparently, it still was not correct, so they had problems. Now, they went to TOA Global - The Outsourced Accountant - and they still had errors in customers' books. No matter how they attacked us, they just couldn't seem to be good at bookkeeping. They weren't even good at outsourcing the bookkeeping, which is even crazier; like playing middleman. Blake Oliver: [00:37:36] Just a total disaster. Now, let's get to this customer. There's a great example in the article of a customer who was harmed by this. David Leary: [00:37:44] Yeah. A customer, last April, canceled her contract. Her name is Lindsey Reinders. She complained online that she found out a ScaleFactor employee had incorrectly credited $17,000 to a customer of her ecommerce business. By the time she realized the error, it was six months after the fact. Blake Oliver: [00:38:04] So, she was out $17,000; couldn't collect it. David Leary: [00:38:04] $17,000. She couldn't get it back- recoup it from the customer. When they started with ScaleFactor, they had a really good clean set of books, when they hired them. Blake Oliver: [00:38:15] Let's take that with a grain of salt because I think every business owner, when they start with you- David Leary: [00:38:18] Okay, that's true. Blake Oliver: [00:38:18] -they're like, "Oh, my books are super-clean. It'll be super-easy for you." David Leary: [00:38:22] Maybe it was a brand-new, empty Xero or QuickBooks file, right? Literally, there's not any data in the books. So, what happened ... This is the really bad part. ScaleFactor finally agreed to offer a partial refund on her annual $23,000 contract, but only if she signed a non-disclosure agreement ... It just says, "Non-disclosure," but it's really a non-disparaging agreement, barring her from talking about her experience, and she said she did not sign it. Blake Oliver: [00:38:49] That's a pretty, pretty big mistake. David Leary: [00:38:51] There's a good quote from a coffee-shop owner. There's a San Francisco-based coffee shop, the owners, Cornelia, and Robert Stang, they're currently hiring a new accountant to fix months of erroneous bookkeeping. They argue, basically, "We're just a coffee shop, and if you can't fix our problems, you can't fix anybody's." Blake Oliver: [00:39:09] It's not that complicated, right? David Leary: [00:39:10] The reason this article existed a couple of weeks back is Kurt Rathmann, and ScaleFactor, they approached Forbes to write an article. "Hey, would you like to cover us and how we had to shut down because of COVID?" Now- Blake Oliver: [00:39:24] Why would they do that? David Leary: [00:39:26] So, now that the reporter has written this scathing article, basically they ... I'll read this - it's actually in the article itself - so I don't misquote this: "ScaleFactor declined to make Rathmann available for an interview for this article and would only respond to emailed questions replying, 'The email below is filled with numerous factual inaccuracies and misrepresentations,' said Rathmann in emailed statements sent by a spokesperson. 'I have no further comment.'" Blake Oliver: [00:39:51] So, just saying it's inaccurate, but not specifically what's inaccurate. David Leary: [00:39:54] Yeah. There's other stories about customers that they just finally canceled the contract because they didn't deliver on the promise. Blake Oliver: [00:40:00] That's the thing that's really like ... I don't know. I find this troubling - they had an internal policy to slow-play customers who wanted to cancel. There was a quota that you couldn't allow more than a certain number of customers to cancel, so they would play all sorts of games with them to try and keep them on the hook. David Leary: [00:40:16] Oh, yeah, we can get into the games. They played lots of different kinds of games. Blake Oliver: [00:40:19] Let's talk about it. David Leary: [00:40:20] When they started to go for the next round, some investors on their due diligence started to discover, like, wait a minute, this is more of a service company and less of a tech company. They're starting to discover- Blake Oliver: [00:40:29] I feel like anybody who did any due diligence should have realized that. We'll talk about that at the end. David Leary: [00:40:35] Actually, there's a whole Twitter thread ... We could talk about the tech, and VCs, and their defense of ScaleFactor, which- we can talk to about tech culture and that separately, a little bit. Not only, like you said, did they prioritize refunds, and they slowed churn, and they tried not to let customers [crosstalk] Blake Oliver: [00:40:54] They DE-prioritized refunds. David Leary: [00:40:55] Yeah, because they didn't want it to affect their numbers when they'd go to get more VC money. Blake Oliver: [00:40:59] Right. David Leary: [00:40:59] Not only that. They actually put - creative accounting ... They put all of the customer service team under cost of goods sold. Blake Oliver: [00:41:07] Well, no, they didn't. So, that's the thing- David Leary: [00:41:10] Oh, yeah, sorry. The opposite, yeah. Go ahead. I'll let you do this. Blake Oliver: [00:41:10] Yeah. This is the accounting trick: if you run an accounting firm, the labor to do the bookkeeping is part of cost of goods sold. That's cost of service. They were putting it under operational expenses, right? David Leary: [00:41:26] Yep. Blake Oliver: [00:41:26] So, it made their business look like a tech company because they had very little cost of goods sold ... You're selling software. They had buried it all in operating expenses. For a firm that supposedly does accounting to do this to its investors, I bet they were pissed when they figured that out. David Leary: [00:41:48] Yeah. Then, did you see what they did with their employees? Because they were pushing for so much sales; they needed sales numbers to get more money, right? Blake Oliver: [00:41:57] The incentives, right? David Leary: [00:41:59] Incentives, yeah. They basically had their sales team. They came out and they said if the team could sell $800,000 in new bookings for the month of June, ScaleFactor would double the team's bonuses, several employees say. For some employees, that was the chance of a lifetime. By the time it was all done - they summarized this - they celebrated; they had a big party. They hit their numbers. They even had arts and crafts. They had the big, huge checks, like those, you know, for photo ops. "Look at this big, huge bonus check I got!" Then, a few weeks later, they basically were told some of the deals weren't good and that they're not legitimate; the team did not hit their goal, and they're not gonna give that money. In the meantime, during that time, because ScaleFactor "hit the numbers," ScaleFactor was able to get that next round. Blake Oliver: [00:42:40] Wow. Wow. So, I, as an investor ... Figuring this out, that ScaleFactor had distorted their financials by misclassifying ... Major accounting irregularity to misclassify the service to do the accounting and bookkeeping, not put that in cost of sales, or cost of goods sold, I'd be pissed about that. Basically, that's lying to your investors. Then, to do that to the sales team? To have them hit this goal, and then, "Oh, they didn't really hit the goal," and use that as a way to get your next round of funding ... We don't have the other side of the story here because ScaleFactor has not commented on this. We should probably go ask them. David Leary: [00:43:22] I've reached out in the past. In a weird, stupid way, I think I've ... Even when I was still at Intuit, I've reached out to Kurt Rathmann before. I reached out to him then; I reached out to him when I was at AutoEntry. I reached out, as the podcast, as well. I've reached out to him a couple of times ... I think I reached out after their first round of layoffs before, when we were wondering about the numbers, and just never got any replies back. Some part of me is like, well, yeah, of course, because if they ever talked to me, or you, we would've smelled everything, instantly. Blake Oliver: [00:43:51] Yeah. David Leary: [00:43:51] It could be completely just me inflating my own ego, but at some level, like I feel like ... I've talked to Pilot ... We've obviously talked to Botkeeper. We've talked to every other player in this space. I've talked to the founders of Bench. I've talked to everybody except for ScaleFactor. I finally talked to ScaleFactor boys at QuickBooks Connect, and then had a Zoom call with them a little bit later on, but I always felt like it was really hard to get a hold of them, in general, for me. Usually, I reach out to a company; I'm like, "Hey, I'm David Leary, blah-blah-blah. I was at Intuit for 20 years ..." They get on a Zoom with me. I just felt it was really, really hard to connect with them. Blake Oliver: [00:44:32] Yeah. David Leary: [00:44:32] There were a couple of conclusions that came in here. One of them is, at the end of the day, the only tool that had any automation in it was an internal workflow engine, basically, a guided to-do list. The best way I could think about this, it's essentially- Blake Oliver: [00:44:46] It's a practice-management tool. David Leary: [00:44:47] Yeah, or it's more similar to a Process Street, where some of that, you do some of the manual process, and you hit a button, and then, that kicks off a Zapier, or something. It runs [crosstalk] Blake Oliver: [00:44:59] Workflow automation. David Leary: [00:45:00] Yeah. That's about where they're at, and if I had a bet anything, it was onboarding. It was all about how do you take that Facebook ad, turn that customer and onboard? It was probably all on that side. Then, at the very end of the article, and I'll just read this word for word: "At the end of the day, Kurt Rathmann explained to Forbes last month, customers were craving a person, rather than a computer to do their accounting. 'We really thought we could automate the entire back office of a small business,' Rathmann said. A lofty goal that more money couldn’t achieve." Blake Oliver: [00:45:29] They never even got close to automating any of it. That's the thing that I don't understand. Did they have tools in development that they just never managed to get out there? If all they really had was a workflow tool, then they really didn't spend the money on building the software, or they completely failed. One thing I would add to the end of this is the VC due diligence. I wonder- I really wonder ... I have questions as to how much due diligence did these VCs do and how did they fundamentally misunderstand the business, to not realize that ScaleFactor was essentially a service business masquerading as a software business? The SaaS metrics - Software as a Service metrics - just don't work in the service business. You are never gonna get the growth that you need to get to get the returns that you need. That's why VCs typically don't invest in accounting firms. It's a slow-growth strategy. David Leary: [00:46:21] It makes me wonder about the due diligence because there's this concept of "eat the dog food," and I'm doing it right now at my job with Melio. I run my business on Melio, so I know what's well, what's bad, what we need to fix in Melio, etc., right? That was the same when I was at QuickBooks. You eat the dog food. I was on the Intuit Payroll team, and you really used the product. You'd either find a business to volunteer for it ... You would actually use the product. If I'm an investor ... If I'm gonna invest in Uber, I'm probably gonna take some Uber rides. Do investors for a company like this, are they like, "All right, here, ScaleFactor, do my books and I'll decide if I'm gonna invest or not?" I don't see that happening- Blake Oliver: [00:46:56] Yeah, no chance. David Leary: [00:46:56] How is the due diligence then? Who's eating the dog food? Is it just you're making decisions on slide decks, and promises? Blake Oliver: [00:47:03] There is so much money in the VC world chasing the good deals that if you're good at selling your idea, your concept, your startup, if you're good at presenting it, there isn't actually a lot of due diligence that happens, unfortunately, because the VCs don't have a lot of time. They've got a lot of money. They need to spend it. They're just throwing it at you. This is a perfect tie-in to Modern Monetary Theory, David, believe it or not. David Leary: [00:47:31] Let's not skip to that yet. Let's not skip to that yet because I wanna talk about the VCs. There are people out there defending ScaleFactor. Many of them are from outside our space. Blake Oliver: [00:47:37] Oh, yes, yes. David Leary: [00:47:37] Like, on Twitter, everybody who's in the accounting/bookkeeping space are just like, "This is embarrassing." It really does- it makes accounting ... I mean, Kurt's a CPA, right? Blake Oliver: [00:47:48] Yeah. David Leary: [00:47:48] It makes CPAs look bad. It makes bookkeeping firms look bad. It creates weird price pressure and weird expectations because they marketed it so well and, ultimately, they messed up small businesses' businesses, and that's the worst part about this. I see this defense, this startup culture, like, "Oh, well, it's startup culture life here. There's gonna be mistakes. These things happen." I'll read a quote from somebody on Twitter. This is a VC investor. He's really criticizing ... Just like we went through this article and talked about the article, he went through and criticized the article. Blake Oliver: [00:48:20] I don't think you mentioned his name. It's Siri Srinivas. David Leary: [00:48:23] He basically went through the article line by line, or point by point, and criticized the article because he's trying to defend that articles like this are kind of out of context. This guy clearly has no idea about ScaleFactor because he writes ... One thing is that this is just qualitative feedback. 'You named three whole companies without knowing any details.' He said, "I surmise that ScaleFactor had hundreds, if not thousands of customers. The article presents no numbers. I can bet the best companies have three grouchy customers." This guy obviously has no idea that ScaleFactor only hit like 500 customers. Blake Oliver: [00:48:56] Right. David Leary: [00:48:56] At best, maybe 750, in their one press release. Blake Oliver: [00:49:00] I got some feedback - I don't remember who it was from - after that episode that we did on ScaleFactor that you have to take into account customer churn in the number of customers that they had. So, it's not that they spent millions to get a few-hundred customers or a thousand customers, whatever it was ... We don't think it was more than a thousand, right? But that they potentially had many thousands of customers over those years, and they just lost them. David Leary: [00:49:24] Well, I don't even know if that's true, and here's the reason why, anecdotally speaking. Usually, I hear from accountants, and bookkeepers, "Oh, my God, I just got a client that was at ScaleFactor, and their books were a mess." I hear it through the grapevine. I didn't ever hear this much about ScaleFactor, and the reason why is I don't think they had enough volume. Blake Oliver: [00:49:42] So, yeah, there's a defense from the other startup folk - it's unfair that they've been targeted this way for failing - but I think, if you really dig into it, it's pretty bad. David Leary: [00:49:53] Yeah, and then he talks about the lady who lost the $17,000, and it's like, "Oh, this shit happens. It's gonna happen." It's very this like, "Uh-oh, startup life ... Sorry, you lost $17,000." Blake Oliver: [00:50:02] Yeah. David Leary: [00:50:02] That really pisses me off because it's complete bullshit. It's okay to make it and fake it if you're making a $14 avocado-toast delivery. If you f*^& that up, it's not a big deal, but if you f*^& up people's small business by $17,000, you could put a small business under. Blake Oliver: [00:50:18] You could. David Leary: [00:50:18] It's just not ... That mindset cannot be there with small businesses. Delivering avocado toast? Fine, be a bullshit company. Fake it. But if you're gonna get into our space - accounting, and bookkeeping - you need to do it correctly. Blake Oliver: [00:50:29] Yes. David Leary: [00:50:29] That's it. If not, get out of our space. Go work on avocado-toast deliveries. It kind of pisses me off that this attitude is there of like, "Oh, well, a small business owner got f*^&ed? Who cares?" Blake Oliver: [00:50:40] So, successful deserves blame. I think the VCs deserve blame for not doing their due diligence. This easy money pouring into startups enables this attitude, this "fake it till you make it," "collateral damage is acceptable" attitude of running a business. David Leary: [00:51:01] We saw that with the Visor Tax. Same thing. Blake Oliver: [00:51:03] Yeah, exactly. It's like, "It's okay, because we're ..." crosstalk David Leary: [00:51:04] "We didn't file your taxes. Oh, well." Blake Oliver: [00:51:07] "We're failing fast. We're breaking things ..." What was it Zuckerberg said? "Move fast and break things" was the motto at Facebook for a long time. We see where that got us, as a society, right? There is economics at play here. This is not just something that's caused because people are, I don't know, unethical or whatnot. In the end, everything comes down to economics- David Leary: [00:51:28] And behaviors, right? Blake Oliver: [00:51:29] -and money determines behavior. So, here's the tie-in to Modern Monetary Theory, which we touched on a little bit in the last episode. We actually didn't talk about it, but I do wanna talk about it. David Leary: [00:51:41] I made a joke about my kids having to pay back the loans or something like that, and- Blake Oliver: [00:51:46] Right, right. So, last episode we were talking about the stimulus and the billions of dollars of PPP. I said I really hope that this did the job, that it actually saved 50 million jobs because it's a lot of money, and our kids are gonna have to pay for it, and we were arguing about that. We were joking about that. That's an argument against spending a ton of money on stimulus, is that, hey, this all has a price - how much is appropriate to spend, and whatnot. [00:52:12] One of our listeners, Sean Birdsell ... Thank you for listening, Sean. He had a really enlightening take on this, and it made me think a lot about economics and about what you and I were talking about. I'll read this thread here. He said, on Twitter, @SBirdsell, "Disappointed to hear @davidleary and @BlakeTOliver make a few amateur mistakes on the @CloudAcctPod in discussing how the US debt will impact future generations. A few thoughts: You need to look at debt service vs GDP, or debt service vs total federal spending. It doesn't matter what the debt is in absolute terms, it matters what the servicing costs are relative to your national spending ... You also need to consider Debt to GDP. You don't "repay" the debt, you just grow the economy. If you consider #Covid_19 to be on par with a war, you're doing just fine. Yes there are risks associated with the unprecedented quantitative easing undertaken by your central bank, but this broad notion of "my kids will need to pay for all this stimulus," or "we'll have to raise taxes to pay for all this PPP funding" is simply false." [00:53:14] So, basically, disputing that idea that we are going to have to pay this back someday because that's not how federal spending works. This concept is broadly known as Modern Monetary Theory, which is that the federal government prints money and has a monopoly on money. If you think like an accountant, you're gonna think there's always a debit for every credit. So, if I create money- if I create an asset, I have to create a liability. That's how a balance sheet works. I think most of us intuitively think that way. When we think when the government prints money, someday, we have to pay that back, right? Or we spend money in the federal government, we someday have to pay that back. David Leary: [00:53:57] Well, I mean, that's when, I think, in the '80s, when they started these debt clocks, or whatever. Blake Oliver: [00:54:01] Right. Yeah, we're burdening future generations. So, economists in this Modern Monetary Theory world say that, actually, that's not necessarily true because the federal government can simply print money. We can use our ability, our monopoly on money, to simply print it and spend it and increase the money supply, and it never actually has to get paid back. The only time it becomes a problem is when you have too much inflation. Basically, as long as you can keep inflation under control, you can just print money. Some economists are saying we should do more of this, and that's how we should dig ourselves out of the COVID recession is just print money, give it to people, let them spend it. I'm vastly simplifying, of course, these economic arguments, but that's one, and that we shouldn't be focused on the debt too much. [00:54:47] Here's the tie-in to the whole VC thing - over the last 10 years, ever since the financial crisis of 2008, this easy money policy of the government has existed. Since 2008, the Fed has doubled the amount of money in the economy; doubled the money supply. What they have done is push down interest rates to almost zero percent to create economic growth. We've made money really cheap. That's had a good impact in that we've been able to sustain a long period of economic growth. But the downside of it - and we can see this in ScaleFactor - is that there's so much money in the economy sloshing around that it doesn't always have a place to go, and it doesn't always get allocated to the best places. So, the idea is like, when money is cheap, you, as a venture capitalist, can easily obtain it, so you're not really that concerned about where you invest it. David Leary: [00:55:38] Then, I guess if you're a rich person, who has lots of money, and if interest rates are only paying one percent, you're gonna be more willing to just start giving it to VCs. Like, "Go try to make some real percentages on this money." Blake Oliver: [00:55:49] Right, because you can't get it in a savings account. Those interest rates are like nothing. It's hard to get it from bonds because bond interest rates are super-low because the federal government essentially can control that with federal interest rates. So, the only place for the money to go where it can get a decent return is capital markets - the stock market or private investments. That's what happens is rich people have a ton of money because it's cheap, and they go put it into assets. That's why the stock market is at record highs, even in the middle of a pandemic, not because the fundamentals are good, but it's because the money just doesn't have anywhere else to go. [00:56:31] So, I went back and forth with Sean on Twitter about this. I get that concept, and I think there is merit to it that, at times, you can just spend your way out of a crisis and not worry about paying it back yet, because if the economy grows, that's great, but there are costs to making money cheap. There's costs to this kind of policy. The cost is that when capital is super-cheap, people don't spend it wisely; they don't invest it wisely. Then we get these long periods of mediocre productivity growth because, you know, you have companies like Hertz that finally went bankrupt, but probably should have gone out of business 10 years ago, but they were able to keep going because they could just borrow and borrow and borrow and borrow at zero-percent interest rates, practically. David Leary: [00:57:17] Isn't that the whole- the Main Street lending program that was part of the stimulus bill. It's giving out- is it the U.S. Treasury? Blake Oliver: [00:57:25] That is the Treasury; they're directly providing loans crosstalk David Leary: [00:57:29] -the Fed's gonna give loans at ridiculously small prices, or interest rates. Blake Oliver: [00:57:35] Yeah, and they're buying ... This is something that's new - for the first time ever, they are directly buying corporate debt. The idea is let's get these bonds off of these corporations' books and then, they can go out and borrow more money. In the end, you're just propping up something that may not be working. I think the term I read is "zombie corporations," these ones that are not really creating value. They are able to keep existing even though they're slowly failing. David Leary: [00:58:01] There are signs of this all over the economy ... The colleges, right? Because there's so much money giving out in student loans, the colleges keep raising prices to get bigger student loans, and that cycle, over and over again. Blake Oliver: [00:58:11] They're not necessarily creating value. You get all of these sort of mid-tier schools that are honestly providing a mediocre education. They're able to exist because everybody needs a college degree, and all this money is floating around and pouring into them for that reason, because the money's easy. Yeah, there's a cost. The Wall Street Journal has a great Saturday essay that just came out yesterday called: "The Rescues Ruining Capitalism." The subtitle is: "Easy money and constant stimulus have undermined the basic dynamics of the free market. We've paid the price in low growth and productivity, falling entrepreneurship, and rising inequality." [00:58:46] This is the counterargument to Modern Monetary Theory, which is that, yes, you can print money; you can make money cheap; and you can keep the economy going that way, but the price is low growth and productivity. In a capitalist system, you need companies to go bankrupt. You need jobs to be destroyed so that new businesses and new jobs can be created that create more value. If you don't allow that to happen, then you stamp out innovation. Apologize to our listeners, if that was a little too wonky, but I think it all ties back to the stimulus, and it all ties back to monetary policy. Although we may not pay that much attention to it on a day-to-day basis, I think it's really critical. David Leary: [00:59:31] It's an interesting balance because there's some portion of the economy, and some portion of citizens who really need that money, or they're not gonna- they're gonna lose their home. They're gonna be homeless, right? But there's a lot of people that don't really need the money, but there's so much of it out there that they can be careless with it. Careless is a broad word, but that's kind of what it is, like, "Ah, well, then throw it at that startup. What do I care? I'll just get some more free money from the government." Blake Oliver: [00:59:54] What's crazy is that The Wall Street Journal is not exactly known as being a publication that brings up class differences very often. They like to ignore that. But, in this article, there's a mention here of how the current policy is really stimulus for the rich. It's a subsidy to the rich, because if you can borrow- if you have the ability to borrow money, like you have relationships with banks, it's cheap. So, it really helps you, as a wealthy person, take money and invest it. Poor people are honestly left out of this. So, it's not a good policy for the poor in the end. Anyway, I thought that was interesting. Take a look and read that. Hey, if you wanna have this conversation with me on Twitter, please, I'm at @BlakeTOliver. I'd love to talk to you about it. I find it fascinating. There's a few more stories here that I wanna hit on, but we're almost over our time here. Actually, we are over our time. David Leary: [01:00:46] I can do a turbo app-news one. Blake Oliver: [01:00:47] Okay. David Leary: [01:00:47] Where it's just the headlines quickly. So, congratulations to you, Blake. Jirav just took in an $8 million Series A funding. Blake Oliver: [01:00:59] Yay! Thank you, David. Yeah, that was a big deal. David Leary: [01:01:03] Apparently, there's a class action suit against Plaid. So, Plaid's what everybody uses to access their bank-feed data. Visa bought Plaid. It's all your bank-feed data. Apparently, there's a lawsuit in California that it's violating people's privacy rights. We're gonna have to keep an eye on that. That's a story that's gonna be brewing. Kabbage, the loan app, the app, Kabbage, they now offer checking accounts. Brex, now, with their bank account, they're offering FDIC insurance. The other startup bank we've talked about, Revolut, they got $80 million more in new funding. Remember, they bought a bookkeeping firm in April? Blake Oliver: [01:01:34] Mm-hmm. David Leary: [01:01:34] That wraps up app news. I think, to go out on a positive note, I heard a podcast this week called, "Painting the Art of Possible" with Brad Smith. It's on the "Moves the Needle" podcast- Blake Oliver: [01:01:45] Former CEO of Intuit. David Leary: [01:01:47] Former CEO of Intuit. It really just gives his life story a little bit and kind of what makes him tick. There's lots of little bullets on productivity hacks you could implement into your own daily life. You really understand the DNA and culture of Intuit after you listen to it. I think it was recorded way before COVID. It just finally got edited and then put out ... It's a light thing to listen to that takes you out of this world we currently live in. So, we'll put a link in to that and add that podcast in. Blake Oliver: [01:02:17] Nice. I already mentioned my Twitter handle. I'm @BlakeTOliver. David, if people wanna reach you online, where can they do that? David Leary: [01:02:25] I'm @DavidLeary. Blake Oliver: [01:02:28] Until next time, David, have a great week. David Leary: [01:02:31] Bye, everybody. Blake Oliver: [01:02:31] Bye.
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