Customer Reviews

The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will Be Worse Than You Think, and How to Prosper Afterwards

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Almost every investor can recall a story of an opportunistic broker or a Wall Street analyst who enthusiastically talks up certain stocks for months. Then, when things get very wrong and the stock tanks, he keeps telling he was basically right all the time, because here is this little fine-print qualifier in his report saying that for all these rosy predictions to become true this and that conditions must persist and this setback mustn't happen, and for the reasons beyond his control this haven't turned out to be, and so on.

"The Coming Internet Depression" has a certain resemblance to such an analyst. Hardly anybody was more enthusiastic cheerleader of the "New Economy" than the "Business Week" where M. Mandel is an economic editor. To reconcile today's post-dot-com meltdown hangover with unbounded enthusiasm before April 2000 the author performs a partially convincing mind trick. There is an "Internet Economy" after all. But now - surprise! - it has its own downside and its downward cycle, which is also very different from the downward cycle of the "Old Economy". He implicitly claims to have known about this all along, although one wouldn't have this impression leafing through the "Business Week" issues of 1995-99. But of course one can always find fine-print qualifiers even there.

To Mr. Mandel's credit, the book most likely have been started before April 2000, which suggests the author was actually shrewder than the overoptimistic tone of the "Business Week" coverage could suggests, and was anticipating the dot-com crash. In this sense, for example, the 1999 book "The Internet Bubble" by the "Red Herring" editors A. Perkins & M. Perkins was earlier, less ambitious, and more specific and intellectually honest. It simply argued that even by very optimistic projection of a future cash flow there is no way one can justify valuations of dot-com companies at that time. Here, in the "Internet Depression" the author attempt a more ambitious task, conceptualizing the whole "Internet Economy". It achieves, in my opinion, a mixed result. One of the problems is that the author doesn't really go deep in explaining his use of the term "depression" as opposed to "recession", "downturn" or other terms. He defines a depression as a "recession that is not followed by a quick and genuine recovery", then adds a few folksy quotes from past politicians along the lines of "a recession is when your neighbor loses a job; a depression is when you lose a job" and such. This is a rather fuzzy description from a respectable economist. It is like a doctor saying that the flu is simply a cold that lasts more than a week instead of a couple of days. More substantial and rigorous distinction can be found, for example, in Paul Krugman's "The Return of Depression Economics". A recession is usually a temporary excess of supply over demand and a liquidity crunch, which can be fairly quickly reversed by a monetary expansion and interest rates cut. A depression is a much more profound crisis when economy stops reacting to expansionary monetary signals and uncontrollably spirals downward into a "liquidity trap". In other words, a recession is when a car ran out of gas, which can be remedied by filling the tank. Depression, on the other hand, is when the engine itself is out of order and requires more costly and elaborate fix - getting under the hood, cleaning filters and pipes, changing worn-out and broken parts. Simply adding gas and pushing the accelerator pedal won't do any good.

Consequently, as M. Mandel doesn't go too deep in exploring the nature and the structure of possible forthcoming depression, he largely views it as simply symmetrical unwinding of the positive feedback loop built during the boom years. The ascending phase is characterized by consumer optimism, stock market growth, large investments, high rate of innovation and rapid advances of productivity allowing to keep prices low; the descending phase - loss of consumer confidence, slumping market, slow innovation, weak productivity, high inflationary pressures.

At the core of this view is the author's concept of the driving force of today's US economy. The "New" in the "New Economy" is not the Internet itself, but rather a novel form of financing innovation - through the venture capital, which have grown enormously since the 1995 Netscape IPO. This is indeed an important and non-obvious conjecture. But is it valid? Venture capital so far proved to be a significant, but far from leading source of R&D expenditures. To a large extent venture money went not to innovations themselves but rather into marketing and hype machine accompanying them. The overall business model of the venture capital industry itself in recent years was not as much to grow a viable and successful business, as to create a vehicle for hype and buzz - the most precious currency in the dot-com-mania period - which can be sold to over-eager investors. This works as long as the stock market goes up, but it is bound to crash and burn as NASDAQ sours. Such business model is like a sailing ship that has been designed and tested only for the down-wind course. What will happen when the wind turns into the opposite direction?

The recipes that the author proposes to overcome the upcoming depression look, although sensible, look remarkably conventional: keep interest rates down, don't engage in tariffs and trade wars, maintain a robust safety net. Among the more non-trivial propositions is to increase government spending on the research and development and training in high-tech skills, which he views as something of a modern version of the "New Deal" public works program. But let's face it - when a serious crisis will finally come, it won't go according to past predictions, and new assessments and recipes will be called for.

I saw an interview of Michael Mandel on CNBC and came looking for this book. He's a "good interview," articulate and well spoken, obviously in full and complete mastery of his subject. And he has hit on a thesis that is a headline-grabber, and thus is getting him on television where he can use those traits to sell books.

As president of a new startup dot-com, (simegen), running an online writing school (to teach people to sell books they write) using the advertising supported model to run the dot-com, (truly a venture in capitalism) I have a very personal, vested interest in averting the economic power-dive Mandel predicts.

In two years of operation we've already changed our business model twice and seen our revenue sources shift alarmingly, and suffer from a shortage of tech skilled people. So from the inside, I can say that Mandel has done his research well.

From the outside, as a professional science fiction writer, with over 40 years of futurology behind me, I have to say that his predictions leave out too many vital factors.

Human nature is driving the dot-com mania -- it's the human need to communicate. It drove the printing-press revolution, the building of railroads, then the automobile, the telephone, and now the internet.

If you don't understand the businessman's term "venture capital" you really should read Mandel's book. If you own any mutual funds with tech investments, you should read this book. If you work in any industry where your job would be at risk if business had to abandon the internet build-out, (as it well might) you must read this book.

Don't discount what Mandel is saying -- it could happen. But - understand that this book is a piece of journalism like Alvin Toffler's FUTURE SHOCK or my own STAR TREK LIVES!.

There is a reason that journalists write books like this. If you understand that reason, you will understand what factors they leave out of their arguments, and what factors they emphasize, and why. You'll understand what editors who buy books have to do with the journalist's choices of emphasis, and what TV interviewers have to do with editorial choices. Then you can think for yourself rather than run scared before a doom-sayer, even one who's right.

This is a book about economics, Wall Street, and the Internet Revolution. The "Internet" became a "Revolution" when corporations started pouring billions of dollars into it. (I remember; I was on the net before that.)

Why did they start pouring in those billions? My answer is "Human Nature" -- having noticed how humans will sacrifice anything to gain communication with other humans, some humans see an opportunity to make a profit. (which isn't a bad thing; it has its place after all)

If profiteers succeed, others notice and soon you have a gold-rush. That's what we're seeing in the internet now -- desperate attempts to stake claims. Some of the properties are worthless, and some are mother-loads. Which is which?

Ask yourself what drives a gold-rush, what brings it to a halt, and what happens after the gold-rush? Mandel is describing one possibility -- what happens when the gold-fever breaks. If you don't remember what happened after the gold-rush in California (or Alaska), go read up on it. Answer the question, then read Mandel's book.

Fifty years after the gold-rush, which families end up as the elite of the wealthy? The prospectors like you and me? Or those who sold them tools and transportation? Once you have that firmly sorted out for yourself, then you must read this book.

Read this book, but not to decide if you agree or disagree, and certainly not to believe it as a prediction of the future. Read this book as an analysis of a set of current trends.

If you understand those trends, you too can make a profit by reading this book -- but not if you don't understand human nature -- the need to dominate, the need to communicate, the need for the ascendency of me-and-mine at the "Center of Things," the need for attention.

If you're starting a dot-com of your own, calculate on the probability that Big Business and Venture Capital will indeed abandon the mountains of the dot-coms. But humans will still passionately seek communication.

Read Mandel, think about what he's saying, and construct your business to thrive in the scenario he describes, both before and after the gold-fever abates. To figure out when the gold-fever will abate for sure, read The Roaring 2000s : Building the Wealth and Lifestyle You Desire in the Greatest Boom in History by Harry S., Jr. Dent which analyzes these trends as a function of the demographics of aging. No one book, no one journalist, can give you the whole picture.

Michael J. Mandel argues that the coming dot com bust will turn into an economic downturn that could be protracted for the U.S. economy. While I agree with Mr. Mandel that bankruptcy filings by dot coms will be the next major source of legal business, the rest of the consequences he speculates about are so remote as to not be worth spending time on.

His basic argument is that venture capital is what sparks most of the innovation in U.S. society, which in turn causes economic growth. With the economic growth comes a strong stock market which makes IPOs possible for the start-ups. Those IPOs then fund access to rapid growth for the start-ups, and attract more venture capital. The cycle can be a positive or a negative one. He points out a long cycle in the 90s of venture capital that has continued to grow. He forecasts the stock market to go in reverse, stopping venture capital funding, shrinking of the economy, and a decline in innovation, etc. In other words, he believes the cycle has turned negative and will stay so for some time.

Economics has long had the reputation of being the gloomy science. This learned examination of the last venture capital cycle into internet stocks reminds me of Malthus's famous speculations about impending starvation and depression because food production could not possibly grow as fast as the population could. The devil's in the assumptions, and Mr. Mandel has made several questionable ones. Let's look at these.

First, he points out that the economic growth rate and unemployment figures definitely improved after the internet stocks got really going. What he does not point out is that we had had unusually slow economic growth for an expansion before that time. So the economy had some slack in it that could be filled up. Giving all of the credit for this faster growth to dot com companies financed by venture capitalists is a stretch. That gives no credit to the extraordinary improvements in existing companies as management effectiveness has had a remarkable period of improvement for the last five years. For example, expenditures for new semiconductor fabs vastly exceed dot com spending as a source of economic growth. This trend in effectiveness should continue unabated, and may even accelerate.

Second, he equates (as do many journalists) all of the venture capital money with research and development. That's just obviously wrong. The bulk of the dot com venture capital funds went into advertising, marketing and subsidizing start-up losses of bad business models. A smaller percentage of this venture capital cycle went into research and development than at any earlier time. So, if we have a research and development bust coming, it's because venture capitalists didn't invest in research and development very much for the last five years.

Third, do we have a research and development bust coming? I think not. The surviving leaders of the new economy are companies like Microsoft, Intel, EMC, Tellabs, Nokia and Gemstar - TV Guide. These companies are rapid and continuous growers of technology spending, and are highly productive in what they spend it on. Dot coms are not and will not be major places to do research and development. More importantly, the earlier venture capital spending of the 1980s is just starting to kick in to produce the potential of biotechnology. That field will soon demand all of the research and development funding it can possibly get, and will have to rely on the public markets for that. Venture capital will be too little for this area. Also, the internet itself has created an environment where ideas can be exchanged and developed much more rapidly than in the past, meaning that expansion of ideas should proceed more rapidly now. The lag time between conceptualization and broadscale application is still more than 20 years, so whatever venture capitalists do now won't have any effect for a long time.

Fourth, there is still a tremendous need to wire the world to complete the establishment of high speed internet access. That wiring will take place, and will keep the economy booming for many years to come. Venture capital will have little to do with this.

Fifth, will venture capital really cut back? As recently as 6 months ago, the venture capitalists I talked to told me that there had never lost on a dot com investment. Now many of those funds have been turned into cash already and have been or will be available for new investments in venture capital. They clearly will go into new areas, rather than dot coms. The bulk of the losses in stocks from dot coms have been suffered by the founders and public investors.

Sixth, the author assumes a long financial and venture capital cycle. I suspect that is a bad assumption. What we have learned is that technology, business, and financial cycles are all becoming shorter. A big drop in venture capital would be the cause of its reemergence, because everyone knows that the best deals come when there is little venture capital money available. People think about starting up new businesses almost as much when there is no venture capital as when there is. Also, technology companies have gotten into the habit of making venture-like investments to get access to new technologies rather than relying on their internal staffs to develop everything. This source of funding will continue to grow rapidly in years ahead.

If you do not buy my arguments, you should know that Mr. Mandel argues that the current time is like 1929 when the expansion of the automobile business preceded the Great Depression of the 1930s. Of course, we have many better financial safety nets available now than then. Also, the rest of the world has enormous slack to begin buying advanced U.S. products that are exported from here. A long U.S. economic boom has always eventually led to a world economic boom in the past. Much of the Internet economic growth will benefit countries outside the U.S. in the next decade.

There is one area where I do agree with him. The Federal Reserve needs to be careful that it does not bring the inflated stock market down too rapidly. But the Federal Reserve has shown every sign of being careful about that already.

If you like to read exciting "what if" scenarios about downside risk, read this book.

Michael Mandel, economics editor at Business Week, has written another economic apocalyptic book, albeit well documented and educational. He writes, as do most with financial backgrounds, in a dry manner (and includes a few charts and graphs often associated with financial writing). His basic premise is that "The U.S. has a New Economy in which the business cycle has been replaced by the tech cycle," and we do not know how to comprehend this new cycle, thus we will be bitten on the butt because of our own ignorance.

Mandel goes on to underscore that since none of us have lived through a "tech bust" we do not know what to expect. While he really doesn't either, he does give us his prognosis of what could happen during this coming tech melt down. He states that, "The downturn is likely to come, as violent and destructive as a hurricane," and that it will bring "devastating damage" to those with jobs in the IT market. The coming internet depression will bring a significant fall in household prosperity, and it will bring a loss of wealth, as the stock market tanks, especially for those with "new economy stocks."

One interesting evaluation Mandel makes is how the U.S. rose to dominate the world market in technology and innovation. He answers the question "Why did the New Economy start in the U.S. rather than Japan or Europe?" by pointing out three important strengths: First, the U.S. had early deregulation and a very flexible labor market. Second, we developed a system capable of financing innovative businesses. Third, we had educated workers who were willing to take risk and step outside the safe confines of the protection of large corporations. Good insight.

Mandel writes about the coming depression but refuses to state when, how long and how deep. At the end of his chapter "The Next Depression," Mandel writes the caveat, "Anyone who puts too much trust in economic forecast runs the risk of finding out that the forecast will be as wrong," so from Mandel we get nothing specific, just the warning that bad times are a-coming. It reminds me of my past interludes with apocalyptic Christians who storm the streets crying, "Jesus is Coming, Jesus is Coming soon!" Jesus has been coming for the past 2000 years but we are still here. Conditionally recommended.

Don't judge a book by it's cover....or in this case, by it's title. The author (Michael J. Mandel) displays a very convincing understanding of the "New Economy". He vividly points out that many economists today have proven they do not understand it, and that some even deny it's existence. This book is not a doom and gloom story as the title would suggest, but is rather a keen insight to future business cycles as compared to past cycles. It is a study of what is really driving our economy today, and how much it differs from the past economic expansions. Most notably, the internet boom will end like no other boom has ever before, and how it must be understood by decision makers when that ultimately happens, else we truly will have a depression on our hands.

I found this book hard to put down, and read it cover to cover in one day. Although parts of it were somewhat dry or repetitive, I recommend it. I have already ordered a copy for my father.

As I only read this last month (December 2000), while the NASDAQ was doing its finest imitation of a "dance of death", it came across as a timely and vital piece of work. Now, with some distance, it appears somewhat less so. I've come to the conclusion that the author had to be sensationalist in order to maximize sales for his volume.

But don't get the idea that I find this book unimportant or a waste of time. As an economist by trade (and my education), I can say that very little of what has taken place over the past decade was adequately anticipated or understood by others of my ilk. Too many of them never took the concept of "New Economy" seriously, and continue to believe in the old school of the Phillips Curve and other discredited relics of the past. Mandel makes an almost Keynesian case here, with his correct diagnosis that the way to keep the 2000 NASDAQ crash from turning into a more severe problem is to pump liquidity into the system, in the form of rate cuts and tax cuts (although he doesn't endorse the latter as clearly as the former - he is a Harvard man after all), and any resulting budget deficits can hang. What happened in the 30's was the opposite, of course, and formed the touchstone for more-or-less all central banking policy since - that is, the Keynesian view of government as a sort of "lender of last resort".

Mandel's central premise is that the tech-dominated economy of the late 1990's and its resulting crash cannot be handled by traditional policy remedies. Worse, he seems certain that the Fed and others won't figure out what to do in time for disaster to be averted. This is too alarmist by half, and I think misses an essential point - and that is that information now flows much faster than in the past and the resulting implications of that, one being that firms (and markets) adjust to changing conditions literally "on a dime" - and he also assumes that demand for IT services and resources will dry up, as it appears to be doing right now. After all, the thinking goes, once everyone has a computer and a cell phone, who will continue to buy more of them? Ah, but we know that they will, because the capabilities of these products will continue to improve and amaze. Indeed, I foresee the excess inventory currently in the system to be flushed in the next 2-3 months or so, then these companies will be rockin' again come May or June.

Still, I recommend reading this book (as I have to many here in Davos this week) because it will force you to think of some things in a different light, especially the global ramifications of what is happening. We can no longer conduct policy in a vacuum. If the Fed lowers interest rates too far, it risks a run on the dollar, with disastrous consequences if Europeans and Japanese have to repatriate funds from the US markets.

Right now, however, the greater dangers to the world economy are the situation in Japan with its expanding catalog of bad loans, and the global energy mess and the need to find a stable world price for oil that will work to the benefit of the producing and consuming nations. We in México would like to see $25 as that price, and it is heartening to think the US with its new leadership will embark on a coherent energy policy, especially with regard to electric power. It is this latter element that is critical to maintaining the high-tech-led "New Economy" (we sometimes call it the "Techonomy"), else Mr. Mandel's more dire predictions may come to pass...

Mandel has been one of the prominent financial journalists to first embrace and then cheerlead the idea of "New Economy". While the idea of a new economy sounds plausible at this point of time, the jury is still out on the veracity of the biggest claims-productivity. Indeed, the works of Robert Gordon and others(Jim Grant) have demonstrated that there has been limited productivity growth in the US outside the manufacturing sector. And even within the manufacturing sector, the growth has been confined primarily to the computer hardware manufacturing. If this were not enough, there's another bit of statistical jugglery involved, what economist call as 'Hedonics'- making adjustments in the value of output based on preceptory factors like quality. Indeed, the statisticians measuring the productivity numbers have assumed that a computer with a higher processing power is more valuable than its slower predecessor( e.g. 1000 Mhz computer is *5 times* the value of a 200 Mhz computer). The GDP numbers for the computer industry are accordingly adjusted several times upwards to reflect their enhanced contribution. This addition accounts for roughly 30% of the productivity miracle of the 'new economy'.

The second pillar of the new economy-low inflation-is beginning to crumble. Energy and food costs are commonly taken out of the inflation calculations while hedonic adjustments are common in this field too. Even without considering these factors, it would be too early to make any claims about the death of inflation. And the most recent trends suggest that core inflation is raising its head again.

In the last 5 years, the unprecedented wealth created in the US has been more of an illusion than a fruition of a miraculous structural improvement. The Fed, with its loose monetary policy deluged the markets with liquidity which made easy entry into stock markets. There has been a significant degeneration in the quality of ventures funded(as we can see from the number of dot com doom stories) along with a lack of patience, absence of the "grower" mindset- taking the firm to the road of profitability and sustainability. Indeed, the VC industry is plagued by 'making a quick buck' attitude, which is in sharp contrast with the principles that helped shape companies such as Cisco, Apple, Intel etc.

So whether you believe in the new economy miracle or not, the prognosis-the coming depression or at least a recession- isn't very pretty. The severity and extent of depression would depend on several other factors, including the dollar strength, inflationary approach of the fed, political resolve to run a higher unemployment etc.

But the question whether or not there was indeed a new economy could be fundamental one as we begin to rebuild the economy after the rubble settles down.

Mandel's work could be an important contribution in supporting the new economy claims which don't assume that DOW 36000 is the only possibility!

I devoured this book in 3 evenings afterwork. I could not put it down. It gives an extremely insightful look at how the New Economy is at risk to new types of failure, that did not effect the Old economy. Whether you agree that this type of economy failure is possible or not it is a must read. You will not be bored.

After seeing MJ Mandel again on cnbc tonight, I felt motivated to send a copy of his his book to a friend. I had first read it about 5 months ago, and am increasingly impressed by how it is playing out in real time now. It is clearly written and is a natural follow up read to Dow 64000 ( I wish ), and to 'Irrational Exuberence". The book was apparently written well before the ongoing fall of the nasdaq these past months. He presents concepts on the tech cycle and "new economy" worth considering by all, and appears to correctly emphasize the danger of too slow monitary and fiscal response to the increasing tech downturn ( come on congress and Greenspan ).His discussion of the delay between the nasdaq fall and the economy fall some year or so later appears well thought out.Hopefully the extent of the down turn he contemplates, will prove milder than he fears ;if so good. If not, this book is surely an important read for investors.

Mandel called it before it happened.... He recognized the patterns in psychographics, world economics, technology, and the road ahead. He shows that the paradigms of the technology driven society we hastily built will need to radically change if we are to continue growing. As we are all painfully aware, we built upon the euphoria of intrinsic technology while the foundation was being eroded by weak (to non-existent) earnings and fundamental business needs. If you want to understand exactly what's going on right now and how to position yourself for the future, you will want to get this book!