Posted by: jhamon | July 13, 2009

California’s Meltdown: It’s the Internet’s Fault

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The Late Great State of California

FastCompany.com has an interesting editorial that blames the Internet for California’s economic demise.  I don’t actually agree with the conclusion – which is that the efficiencies realized by the Internet are deflationary.  Rather, it seems to me like an easy money policy designed to prevent a Y2K meltdown resulted in a dot.com boom.  When the bubble burst, policy makers lacked the stomach to accept the recessionary consequences and let still more money flow. 

But it’s an interesting argument and for the ADD crowd, below is my outline.  You can read the rest here.

“How the Tech Boom Terminated California’s Economy.”  Thesis – the dot.com boom and subsequent bust are the real cause of current economic mess:

  • California can’t pay its bills because it’s dealing with the double trouble – lower employment (lower tax receipts) and lower portfolio values
  • 80’s biotech boom had found no successor – equities markets were tired – recession was coming
  • Internet offered a renewed reason to invest in equities
  • Fed printed money – it found its way into dot.com and caused NASDAQ to quadruple
  • Internet couldn’t really sustain such a high level of investment  – malinvestment resulted and a crash ensued
  • Greenspan attempted orchestrate a soft landing with easy money and the result was the real estate boom
  • The real problem with Internet is even deeper: compared to hardware companies, Internet companies are not capital intensive
  • But cash-laden VCs were chasing everything with too much money
  • As Internet companies fail the tax base shrinks
  • The efficiencies the Internet brings place a huge deflationary pressure on the economy
  • Ergo, it’s all the Internet’s fault
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