[TheSkeptic]

When the central banks pump money into economies, it has a cascading effect that influences the behavior of investors directly and indirectly.

Take a wealthy individual who is a limited partner in several VC funds. Like most wealthy individuals, he has investments across numerous asset classes. Many of those asset classes (equities, commodities, etc.) are heavily impacted by the Fed's policies. Needless to say, this individual is far more likely to feel comfortable pouring some money into a new VC fund he has been pitched when his other investments are doing well courtesy of Helicopter Ben's printing press.

Without willing investors, VC firms can't raise new funds and certainly, had there not been a massive pumping of cheap money into the global economy from the central banks, many of the massive VC funds, more than a few of which are being used to buy up shares in companies like Facebook and Zynga, would not exist.

[timr]

"Take a wealthy individual who is a limited partner in several VC funds. Like most wealthy individuals, he has investments across numerous asset classes. Many of those asset classes (equities, commodities, etc.) are heavily impacted by the Fed's policies. Needless to say, this individual is far more likely to feel comfortable pouring some money into a new VC fund he has been pitched when his other investments are doing well courtesy of Helicopter Ben's printing press."

That's just exactly wrong.

"Helicopter Ben", as you oh-so-blithely put it, is injecting money into the economy (as was Greenspan -- a famous conservative -- who started the process). This tends to lower interest rates across all sorts of different asset classes. It's a big part of the reason that savings accounts are returning <<1%, and why people have been taking their chances on ever-riskier investments for the better part of two decades. They can't get returns in safer asset classes.

People aren't investing in VC funds because they "feel comfortable" -- they're investing in VC funds because they can't match the inflation rate in anything better. Nobody invests in a high-risk asset if they can get great returns in a low-risk asset, no matter how "comfortable" they may feel.

[TheSkeptic]

First, you seem to confuse "rate of return", "inflation rates", and "interest rate." They are not the same thing, yet you conflate them.

But let's roll with it. You still make a number of flawed assumptions:

1. That all investors believe inflation is the problem. George Soros, for instance, is more concerned about deflation and up until recently, had significant holdings in gold as protection against deflation. Ironically, others, like John Paulson, are still holding gold as a protection against inflation. Only time will tell who made the right bet for the right reasons.

2. That an individual seeking capital preservation has to take on "ever-riskier investments." High net worth individuals do not have the same investment options as you do. There are numerous ways you can preserve cash (without sitting in cash) without having to bet the farm, even in today's economy.

3. That diversification plays little to no role in investment decisions. Again, if your portfolio has large exposure to equities, commodities and other asset classes that have gained substantially over the past two years, you are far more likely to feel comfortable cashing out some of your gains and/or throwing idle cash into other asset classes.

4. That VC provides a solid return. If you look at the 10 year returns, VC hardly looks like the asset class an aggressive investor would park his money. See http://finance.fortune.cnn.com/2011/02/16/venture-capital-re....

5. The above brings us to your last flawed assumption: that every investment decision is rational. If every investor made truly rational decisions, the desire to protect against inflation would not lead one to invest in VC. You'd be overweight commodities, FX, etc. Again, there are a whole host of reasons investors throw money (generally a small portion of their total portfolio BTW) at VC. Diversification is one of them, but don't doubt the lure of bragging rights either. If you golf with high net worth individuals, you'll quickly learn that they like to brag about their investments, even if they're not necessarily good ones. After all, nothing says cool like "I have $2 mil in a fund that owns a bunch of Facebook stock."

At the end of the day, my original point stands: when the central banks pump money into economies, it has a cascading effect that influences the behavior of investors directly and indirectly.