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The real tech crash is still on the way Date: 27/11/2000

April's rout was just a start. Paul Sheehan explains.

A year ago dot com companies were raising tens of millions of dollars on the basis of blue-sky business plans. Today they are culturally passe.

No wonder. Look at the carnage in the IT sector in Australia. Look at the Nasdaq. Look at the great totem, Amazon, which managed to go from a market capitalisation of $US48 billion to $US8 billion ($15.3 billion) in less than a year.

Now comes Michael Mandel, a Harvard PhD and economics editor of Business Week, who has written The Coming Internet Depression. He doesn't muck around:

"Rather than suffer a single sharp crash, the market will sour over time. The leading-edge Internet companies will tumble even farther than they did in the spring of 2000," Mandel writes.

"Initial public offerings will come to a dead halt and the downdraft will spread to technology stocks, which accounted for roughly 45 per cent of the gain in market value during the New Economy boom. Attempts by investors to pull their money out of the stockmarket will drive down prices even further."

The key element in the long American market boom, argues Mandel, is the same key element that turns the bull into a bear: venture capital. The US venture capital sector was way ahead of the rest of the world and was vital in the emergence of the US as the dominant high-tech power.

"Why did the New Economy start in the US, rather than in Japan or Europe?" Mandel asks. "After all, Japan and Germany began the 1990s with almost as a good a technology base ... and in some areas better. They invested more in civilian R&D as a share of GDP than the US did ... Moreover, the US was the least globalised of all the major industrial countries."

America's edge was its dynamic venture capital sector. Even in 1988, VC was still relatively minor in the US economy (and minuscule elsewhere). America invested $US5 billion in VC, compared to total US spending on R&D of $US134 billion.

Fast forward to 1999: the VC sector provided $US48 billion for start-ups and in the first quarter of this year VC spending equalled one-third of the money spent on R&D in the quarter.

The competition posed by start-up companies (mostly New Economy) forced the mainstream (Old Economy) to not only speed up innovation but to restrain prices. This flowed through to increased productivity and lower inflation. But this virtuous circle can turn into a vicious cycle, argues Mandel:

"When the economy and the stockmarket slide, so does the funding for innovative new businesses - and not by a small amount. In the aftermath of the 1987 crash, venture capital halved, from $US5.2 billion in 1987 to $US2.6 billion in 1991. A 50 per cent fall today would send investment funding plunging from roughly $US50 billion in 1999 to $US25 billion or less."

Since 1995 the information technology sector has accounted for roughly 25 per cent of total GDP growth in the US. In the year to June 30, 2000, computers, semiconductors and communications equipment accounted for roughly 75 per cent of the growth in US manufacturing production.

Just four companies - Intel, Microsoft, Cisco and America Online - were responsible for more than $US1 trillion in market value over the five years to 2000.

The flow-on effect to the economy has been enormous. Payrolls have exploded in the tech sector and the big tech companies have generated huge amounts of cash.

Mandel thinks we've been in an asset bubble so the April tech wreck was just the beginning. He expects a burst of "suppressed" inflation as companies seek to maintain profits by raising prices, which will be easier because of the slowdown in competition from insurgent companies.

His strategy? If you accept his theory, cut personal debt levels now! He believes governments will need to pick up the slack on funding for R&D, innovation and education. "In the end, it will be necessary to cut taxes and increase spending."

-- Carl Jenkins (, November 28, 2000


I still find it hard to believe that the coming internet crash can be that bad. After all, e-commerce is the coming thing.

-- JackW (, November 29, 2000.

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