Here are some excerpts from a new book by Michael Mandel. Some of the
possibilities he suggests are grim, but I don't mean for this post to be a
downer. There are always opportunities. Some people made fortunes during the
depression years of the 1930's. It's a simple fact that the stock market is
presently overvalued in terms of objective value of corporate assets (both
tangible and intangible and including such items as R&D and [especially]
market development expenditures) and future cash flows. I have not yet seen
any evidence that would lead me to believe that such a situation can be
An economy going into a phase of inflationary depression is especially
tricky. Ordinarily, one would want to be ready to take advantage of bargains
that arise as stock prices fall to more realistic values, but when one can't
rely on maintaining a strong cash position this is a problem. In the past,
converting a significant % of one's cash to precious metals has worked. Any
thoughts out there on what might work this time around if the economy heads
The New Economy is not simply a more cosmopolitan version of the old
industrial economy, a faster model with better suspension and steering. It
is something very different.”
One of the great strengths of the New Economy — and its great flaw as
well — is the blossoming of a systematic market mechanism devoted to finding
and funding technological and business innovation on a large scale.
This mechanism includes venture capital funds, which funnel money from
pension funds and other large investors into high-risk, high-return new
businesses; stock exchanges that easily allow new firms to go public; a
large pool of sophisticated risk-taking capital; and a cohort of skilled
workers who are willing to take chances on working for new firms, in
exchange for the prospect of stock options and future wealth.
So what’s the problem? It’s this: for the first time, the process of
technological and business innovation amplifies the normal rhythms of the
Funding for innovation now depends on the state of the stock market and
the expected growth of the country’s gross domestic product (GDP).
Technology has become synchronized with the ups and downs of the rest of the
The result is that the Old Economy business cycle has been replaced by
the New Economy tech cycle: longer expansions, followed by deeper and
On the upside, innovation and economic growth reinforce each other.
More money spent on innovation means faster growth with low inflation.
Faster growth and a rising stock market increase the incentives to invest in
innovation — which yields more startups, faster adoption of technology, and
more pressure on existing companies to keep up.
But when a downturn starts, watch out. The powerful forces that have made
the New Economy so dynamic will begin moving in reverse — first slowly, then
faster and faster. Rather than being led by housing and autos, as in the
past, the next recession will be driven by the innovative sectors of the
A falling stock market and a slowing economy will mean lower potential
payoffs even from successful startups, which will diminish the willingness
of venture capitalists and corporations to put resources into the risky
business of developing new innovations. The number of startups will decline,
the pace of innovation will slow, and prices for tech equipment will fall
more slowly or even start to rise, reducing the willingness of companies to
buy new technology.
What’s worse, as the wave of innovation slows, existing companies will
lose their fear of being overrun by new competitors. With less pressure from
rivals, and facing slower productivity growth and a squeeze on profit
margins, any increase in wages will immediately translate into higher
prices. Inflation will jump back in every sector of the economy.
Some of the most lauded features of the New Economy will come back to haunt
us. When venture capital dries up, so will the multitude of jobs being
funded by it. The young college and business-school graduates who joined the
dot.com revolution hoping for a quick score will be back living with their
parents. Stock options will become worthless pieces of paper.
The unemployment rate will soar, affecting people who never expected to
be out of work. Almost 60 percent of the new jobs generated between 1995 and
2000 were managerial or professional jobs, and these will be hit hard by the
tech cycle downturn.
The biggest cuts will happen among the people most intimately
associated with the New Economy — the web site designers, the marketers at
dot.coms, the consultants and investment bankers who rode the boom, and the
journalists who covered them. The shortages of information technology (IT)
workers will turn into surpluses
The deterioration of the U.S. economy will not happen overnight. The
protective institutions put in place in the 1930s will mean that there will
be no banking panic, no wholesale closing of factories, no moment where it
feels like the economy is in free fall. Even once the slowdown begins to
broaden and deepen, it could take a year or two for the U.S. to actually
slip into recession.”
That’s bad enough. But if policymakers don’t respond quickly and
aggressively to the unfolding tech downturn, there’s a good chance that it
could morph into something deeper and more sinister — an Internet Depression
that drains the economy of its vigor for an extended period.
It’s instructive to look back at the events of 1929 and 1930. It took
about a year after the October 1929 stock market crash before businesses and
investors realized that they were not simply in a mild decline. In the
aftermath of the crash, the market actually rebounded, and for much of April
1930 the Standard and Poor’s index was up on a year-over-year basis.
Similarly, it took at least a year before the effects of the 1990
Japanese stock market collapse percolated through that nation’s economy. The
Nikkei index peaked at the end of 1989 and then dropped by as much as 50
percent in 1990, triggering a decade-long slump. But well into 1991 — more
than a year later — capital investment was still rising rapidly, inflation
was accelerating, and the governor of the Bank of Japan was still talking
about the strong economy. The unemployment rate, which had dropped as low as
2 percent, did not rise over 2.2 percent until late in 1992.
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