Another Tech Bust Coming?

by Jeffrey Tucker

Is a blowout bust coming for high-flying Internet stocks? There was the disappointing Facebook IPO, but many people wrote that off as due to managerial errors at the Nasdaq. But those errors must have persisted, because the stock has been down nearly 40%, reaching a low point. Every talking head is muttering about the problem of how Facebook is going to pay its bills.

An isolated case or a foreshadowing of widespread disaster? If events play out in the way of the dot-com bust of a generation ago, a rout of specific, high-profile properties could be coming, and with it another overreaction against all things digital. Unlike 12 years ago, however, the digital economy is now deeply embedded in the structure of the whole of our lives.

The merit or silliness of social media has nothing to do with it. There is a lot of fake money sloshing around out there, courtesy of the Fed's magical stimulus policy. Money is not the abstraction econometric models imagine it to be. It lands in specific places, put there by fallible human beings who follow fashions and manias.

When any bubble deflates, it's surprising for only a short while, maybe just a few days. Then it becomes inevitable and obvious in retrospect, and everyone laughs at the goofballs who failed to see the writing on the wall. You would swear that during the bust no one with a brain ever believed the boom would last, just as during the boom no one with a brain failed to get rich off it.

Facebook is only the most-prominent case. A more-obscure case concerns the sale of Digg.com. It was purchased by News.me for a paltry $500,000. It was not too many years ago when its founder was on Newsweek's cover as the "$60 Million Man." Whispers only two years ago suggested that the site was worth $200 million-plus.

To what can we attribute this garage-sale pricing? Well, it seems obvious in retrospect (it always does) that Digg.com made some catastrophic errors in managing the core users of the site. It began as a news aggregator for geeks. Like many people, I was hooked.

But then the management dealt with a series of crises over the fairness of what stories landed on the front page and what stories did not. The site was constantly "gamed" by the techies, and the mobs began to scream that this was somehow leading to undemocratic results. Massive energy was poured into outsmarting the geeks who were their main users, all in favor of the rabble, who had no editorial sense.

Suddenly, Digg became uncool. Its content became mainstream and dumbed down, dealing in common news and opinion, rather than quirky and eccentric material appreciated by the smart set. It was displaced and overshadowed. Its value sunk.

But as soon as I try to explain this mess in those terms, I'm noticing something. Digg is still gigantically popular! It is the 35th most popular website in the United States. It ranks in the top 200 sites worldwide, with 1 million sites linking in. It's not what it used to be, but by anyone's standards, these are amazing numbers.

This is hugely valuable real estate. It certainly doesn't look like a failure. LinkedIn, whose financials are regarded as sound and which enjoys a soaring stock price for now, is ranked not that much different in traffic (No. 10 in the U.S.).

The question everyone is asking: What is the economic value of traffic alone? Maybe next to nothing, if there is not a sustainable revenue model that deals with economic fundamentals. Site owners must find a way to do business, and there is no clear road map based on long tradition. It requires careful entrepreneurship, technological savvy, and attentive listening to and following market signals.

Just as some physical buildings are worth no more than the land on which they rest, many domain names are probably worth more than the content and businesses they currently host. For this reason, a new dot com bust will be less of an exodus than a reshuffling of ownership titles. But lots of stock holders could suffer in the process.

Other ominous signs of a dawning bust include Zynga, the publicly traded gaming site with a sinking stock price, as well as Groupon, the genius marketing platform that went from fashionable to dull in record time. Both of these once-amazing sites are down 65% in six months.

The boom-bust cycle as explained by Ludwig von Mises and F.A. Hayek is set off by central bank manipulation of the interest rates in an effort to stimulate the economy and artificially lengthen the time horizon of the production structure in an unsustainable way. The bust hits when that boom illusion is punctured by reality.

Economist Roger Garrison adds an interesting practical twist. He says that in the boom, the freshly faked money tends to gravitate toward prevailing investor fashions. Real estate is an example in our times. But it could be oil, education, bonds or whatever. Social media and Internet commerce seem like likely candidates for overvaluation simply because they were so consistently undervalued after the last dot-com bust and because they have such a bright future.

The boom-to-bust cycle is not generated by human psychology alone or the inherently frenzied nature of capital markets. It is set off by the manipulation of money and credit. It's the central bank that sets it all in motion and ends up discrediting the achievements of the market economy.

The central bank ends up subsidizing good things like housing and technology in a way that can't last, giving us too much of a good thing too soon. If a bubble in this section explodes in the coming months or weeks, the ignorant among us will trash the venues themselves as silly and pointless. Serious minds will see that this sector is taking a beating precisely for its virtues.

This process is the central bank's way of undermining the signaling system of the market economy, distorting the investment structure and bringing unneeded confusion and frenzy to the development of the market process. The credit creation process is the poison that ruins what would otherwise be a wonderful meal.

If that bust comes, we might start seeing some great innovations shut down temporarily and forced to delay progress until after liquidation, provided this is permitted to come. Only something as powerful and essentially evil as a central bank could discredit the greatest technological revolution since the 18th century.

Regardless, there is no turning back. The privatization of the Internet in 1995 signaled the dawn of a new epoch in the history of humanity, one which has universalized human communication and commercial relationships in a way that was previously unimaginable. It will take more than stupid central bank policies to reverse this great leap in history.
_
Jeffrey Tucker is the publisher and executive editor of Laissez-Faire Books, the Primus inter pares of the Laissez Faire Club, and the author of Bourbon for Breakfast: Living Outside the Statist Quo and It's a Jetsons World: Private Miracles and Public Crimes, among thousands of articles. tucker@lfb.org | Facebook | Twitter

SHARE:

Email This

Latest Economy
- Tobacco Speakeasy: Prohibition Lite Is Making RYO Cigarettes All the Rage
- "Taxation is legalized form of robbery"
- The Crackdown On Alternative Currencies: Liberty Reserve Shut Down As Founder Arrested
- NYC Says Renting Out Your Place Via Airbnb Is Running An Illegal Hotel
- Should Bitcoin Be Regulated Like Dollars?
- How to Not Attack Capitalism
- How Protectionism Hurts Hawaii: Why It's Time to Repeal the Jones Act
- If It Moves, Tax It

No Comments Posted

Add Comment

Add Comment

Name

Comment

* No HTML

Verification *

Please Enter the Verification Code Seen Below

PLEASE NOTE

Please see our About Page, our Disclaimer, and our Comments Policy.

FAIR USE NOTICE

This site contains copyrighted material the use of which in some cases has not been specifically authorized by the copyright owner. Such material is made available for the purposes of news reporting, education, research, comment, and criticism, which constitutes a 'fair use' of such copyrighted material in accordance with Title 17 U.S.C. Section 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. It is our policy to respond to notices of alleged infringement that comply with the Digital Millennium Copyright Act (found at the U.S. Copyright Office) and other applicable intellectual property laws. It is our policy to remove material from public view that we believe in good faith to be copyrighted material that has been illegally copied and distributed by any of our members or users.

About Us - Disclaimer - Privacy Policy