I spent then years working in Silicon Valley, and recently returned to my ancestral homeland of Ohio. Many people are following similar trends, and this is common knowledge. I think there’s an untold story around “The Great Migration” and inflation. My view is that inflation has been happening for years, but it was mostly constrained to financial assets and costal cities. Remote work lifted a constraint on the most productive kind of labor – software engineers – which is translating into higher labor costs everywhere. It’s as if COVID burst a dam which was previously preventing a flood of money from leaving the coasts.

Take a look at this software engineer salary sharing website. Click on a level somewhere in the middle say, E5 at facebook. An ‘E5’ software engineer at Facebook is a role you can get after, say, 5-8 years out of college. The total compensation of $400k per year is not an exaggeration or a falsehood – it’s real. If you don’t believe me, check out this spreadsheet I made for engineers at “UNTITLED LARGE TECH COMPANY” to share their compensation. Look at the ‘total annual comp’ numbers in column S. This tab makes it simpler to see averages. If THAT isn’t enough to convince you, look at this property listing in Sunnyvale, CA to see what 1.65 Million gets you: 3 bedrooms, 1.5 bathrooms, 1300 square feet of living space, and schools that are… not great. Yes, a pair of married tech workers at a big company, with a decade of seniority, really are earning over $1M a year.

I had one mentor at Google who showed me his offer letter for another company upon leaving: $5M a year. He recently bought a new house, for $3 million, close enough to his neighbors that he can hear them watching TV at night. Meanwhile, here’s what $2.5 million gets you in Ohio.

Which explanation is simpler here:

People in California are paying absurd prices for tiny pieces of land, because they have absurdly large salaries, but their cost of living is also higher, so even though they are technically millionaires, and have massive 401k’s, they have a quality of life that is arguably comparable to a self-employed plumber living in Milford Ohio, who can buy a house like this for $250k?

OR:

Inflation hit California, New York, and other coastal cities, years ago, and it stayed there, because massively inflated salaries were constrained to the areas affected by the inflation?

Try putting these concepts together and see what happens:

• One of the key drivers of inflation has always been labor cost.
• Productivity gains have, in general, declined for decades, while demand for software engineers has exploded
• Technology, in general, is deflationary – mobile phones cost about the same as they did a decade ago, but less than a desktop in 1980
• Fully 75%(!) of silicon valley employees are not US citizens.

The inflation story I see is this: we broke the link between the dollar and gold in 1971. We’ve kept inflation at bay in part because advancing technology is naturally deflationary, and in part through internationalism. We kept production costs low by outsourcing all the manufacturing we could to foreign countries, while importing as much labor as possible from these foreign countries. And even despite massive technological advances, outsourcing and immigration, Inflation still hit hard, but only in a few places where the foreign labor was brought in to work jobs in the only sector that experienced massive productivity gains: high technology.

These highly paid tech workers spend some of their money locally and invested the rest. The local influx of cash explains $1000/sq foot real estate and $15 avocado toast. Married couples with ~10 years of experience jointly earning over $1M dollars a year as a couple, saving the majority of their savings in index funds, explains a booming stock market with PE ratios in the hundreds. In addition to the massive salaries, what the tech companies have been selling is ‘access to America’, and they had to do this, because most Americans don’t want to relocate to an expensive place, far from their families and home networks, in order to make more money. If they built more regional offices and hired more people, the inflation would have leaked out. Why spread that wealth around the rest of America when you can keep it local by hiring people who are already relocating to America anyhow?

Oh yeah, and most of that total comp is stock based, not cash. So wealthy tech workers get paid their giant salaries in stock, which they sell and then put into robo-advisors who reallocate them back into stocks. The game can go on forever – until the tech workers start leaving and carrying the inflation with them.

The End is Nigh

In late 2020, My wife and I relocated to my ancestral homeland and immediately bought an older house which we started renovating. All the contractors we found told us they’d never been busier. Look at this chart of unemployment by state, though. It looks to me like what’s happening is now that enough highly paid tech workers are leaving California, New York, and other coastal cities, that they are driving up costs everywhere, because they are putting their money into hard, unforgeable physical assets – like two by fours, roofing tiles, and the skilled craftsmen who come and install them. Buying real assets ends up causing their prices to go up too, but the price of wood counts for inflation, while shares of facebook do not.

How much of inflation is caused by people with stock based comp buying real assets, rather than dumping their employer’s stock comp in exchange for a basket of stocks of other tech companies, all of whose biggest expenses are labor?

Inflation has been here for a long time. It’s only been benefitting the insiders. The constraints that kept it at bay are now gone. You can protect yourself by buying bitcoin.