JFK once coined the phrase to promote his efforts around building a dam back in 1963 in a desperate push to revive the economy.I’m afraid I’m going to put the above aphorism in a not-so-bright light. There are many floating startups on the Web who have been valued at exorbitant sums. The valuations are so excessive that many folks are hinting at another dot com bust.
Let’s step back a few years to go over some of the precursors of today’s state of affairs. Here’s a very concentrated but less deserving recount to what I think has led to this nonsense. In 2007, the US triggered a world-wide financial crisis due to many years of accumulated recklessness by financial institutions. The illiquidity was so staggering that banks stopped lending money to other peer banks and consumers. This deadlock was so extreme that the crisis almost rivaled the Great Depression.
The Fed intervened by making an all-you-can-eat virtual cash box available to these banking institutions. The several rounds of cash infusions were meant to encourage the banks to lend in the hopes of kick starting the ailing economy. Alas, banks kept the cash to artificially increase their liquidity levels and avoid the looming stress tests. The availability of these assets and the terms under which they were lent made it almost unnecessary for the banks to try to seek a return on the freely available cash. Again, why risk lending when you can artificially make the balance sheet look good and honker down in safety waiting for the storm to pass?
With this excess in cash and the effects of the crisis, banks had no reason to lure cash-wealthy individuals with high interest rates. In fact, the interest rates dropped dramatically. This fact alone is crucial in understanding the current state of affairs in this Web economy. Here you have a lot of cash-wealthy individuals with poor interest rates and almost no other way to get a higher return.
The need for higher returns means that these investors, and there are many of them right now, have to take more, thought-to-be-calculated, risk; add to it Google’s acquisition success stories every now and then, and you have the perfect oil to fire ratio to get us where we are today. We’re not finished yet. Expect one or two more years before it bursts. The good news for some folks is that the world economy would have recovered well by then to sustain the Internet down cycle but it remains bad news for those making a living on the net like us.
Here we are rising in concert unaware of the looming low tide ahead. Enjoy the view while it lasts.
That’s all folks! I hope you appreciate this article.