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Wild Gyrations

There are those who fear that the very acceleration in the speed of change will short-circuit the current upwave. Never before has a new technology been adopted as rapidly as the Internet. Does that mean that the Internet upwave may only have lasted five years, culminating in the Nasdaq crash of 2000? I believe not. While we have seen a major meltdown in the value of TMT stocks, the underlying forces of expansion remain extremely positive. The complementary development of the mobile Net and limitless bandwidth will have a profound further effect on IT development, as I discussed in Chapter 3. The applications in the future will be enormously exciting, thanks to the development of voice-recognition technology and video streaming. As yet, less than 10 percent of the world's population is online; even in the rich world, the figure is only just over 35 percent. While the U.S., Canada, Australia, and the Scandinavian countries are ahead of the pack, the opportunities for global growth of TMT businesses in these countries are immense.

But the news won't be all positive, as we have so painfully seen. In every upwave there are excesses—speculative bubbles—that often burst with surprising ferocity. We lived through that in 2000–2001. History has shown us that technology-driven downturns can be traumatic, particularly when the new technology has captured the imagination of the population.

Take, for example, the railroads, which dominated the economy in the second half of the 1800s, just as IT does today. During this period, whenever railroad expansion took a breather, the economy and the markets were pummeled. A slowdown in railroad construction helped trigger the panic of 1873, an economic contraction that lasted until 1879. The failure of railroads, such as Philadelphia & Reading Railroad Co. in 1896, and the resulting financial panic helped cause the near-depression and widespread layoffs of the 1890s. We marked this tumultuous period as one of a downwave, but I do not believe that the dot-com sell-off marked the beginning of a downwave this cycle. Too much is yet to happen with the Net and other burgeoning technologies. An information technology revolution remains in place, with bullish implications for long-run productivity and growth. The U.S. is in a long wave upturn that began in the mid-1990s and still has many years to run. Nevertheless, technology is a cyclical sector and there was substantial overinvestment in IT during the boom years—especially in 1999 and the first half of 2000. It is likely, therefore, that IT investment growth will contract in 2001 for the first time since 1991, as the excess capacity is worked off.

In a similar vein to the railroads in the nineteenth century, the expansion of the auto industry was a major thrust for the boom in the early twentieth century. Between 1893 and 1914, there were 1.7 million automobiles registered in the United States, but by 1920 there were more than 8 million and by 1929, there were in excess of 23 million cars. Auto demand peaked in 1929 because the Fed raised interest rates and because the car-buying needs of Americans were temporarily sated after a decade-long splurge. At first, the rest of the economy seemed to hang in. But without the impetus from the car industry, the boom could not continue. The result was the October 1929 crash and ensuing downturn, which hit the automakers and their suppliers first and hardest. It wasn't until the Fed started easing monetary policy years later that the auto industry began to recover.

Fortunately, the Fed is a lot more savvy today and understands the importance of the technology sector for the future well-being of the economy. When the tech stocks plunged in 2000 and the economy weakened sharply, the Fed responded quickly.

The past offers some good news for the present. Despite the viciousness of the railroad and auto-led downturns during earlier downwaves, the industries came back stronger than ever. The 1890s slump was followed by a resumption of railroad expansion. From 1895 to 1915, the number of passenger miles traveled by rail nearly tripled as Americans took advantage of fast, cheap transport. In addition, cheap shipping costs contributed to the rapid productivity growth of the early twentieth century.

Moreover, like today, the railroad and automobile booms led to the entrance of too many competitors, many of which went under when the economy slowed. Between 1900 and 1910, a whopping 485 automobile companies entered the industry only to ultimately disappear, just as today hundreds of dot-com companies have shut down or been swallowed up by the giants in the sector. These shakeouts are healthy. They did not damage the long-term soundness of the auto industry. The collapse of auto sales in the early 1930s brought substantial consolidation, as well-known carmakers such as Pierce-Arrow, Auburn, and Franklin went under or were greatly weakened. But overall, the auto industry emerged from the Great Depression with its position at the core of the economy more solid than ever. Sales rebounded in 1936 and 1937, and big automakers became the major powerhouses of the economy, a role they maintained well into the postwar era. While we will not see the same concentration in the B2C world as in autos, consolidation is likely in the optical network manufacturers and the telecoms.

The implication for today is clear. No matter how long the tech slowdown lasts and how weak tech stocks become, we will have an information-led economy. This does not mean, however, that the 2000–2001 tech slowdown did not do damage. It did, in terms of the overall economic expansion and certainly in terms of the trillions of dollars of wealth that were obliterated. But there is more to this upwave than just the Internet, and the Net itself will continue to expand. With biotech, nanotech, and fuel-cell technology, this could be a much more powerful upwave than some of its predecessors. Moreover, as history has shown, the tech sector will once again emerge as a leading propellant of growth.

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