We all remember one of the biggest economic collapses two decades ago when the US stock market crashed due to an asset valuation bubble of unviable Internet startups. Not only did unprofitable startups go bankrupt at that time, but this bubble bursting even hit successful companies that had established business processes and were good at generating profits.
The truth is that many experts are now finding some similarities with the current situation. Perhaps past mistakes will help us cope with crises in the future.
The Internet of the 90s: Beta Technology
The first half of the nineties of the last century was marked by the active development of Internet resources. This was the time Internet-related companies boomed (the eBay online auction, the Amazon online bookstore, search engines such as Google, Yahoo, etc.).
The biggest optimists were investors who put huge sums into unknown startups. According to Investopedia, in 1999, about 39% of US venture capital was concentrated in Internet companies with significantly inflated capitalization. Such companies were founded almost every day.
Their primary strategy was “grow fast or die.” The founders of such startups did their best to raise as much investment as possible and use it for advertising and brand awareness to raise even more funds in the future. They did not bother about establishing business processes, finding profitable niches, or making a profit.
In January 2000, at the height of reckless spending, 14 Internet startups were able to afford the most expensive TV commercials during the Super Bowl, the most significant sporting event in the United States. Two months later, the stock market experienced a sharp historical collapse.
Obviously, the bubble was inflating, and it would have burst anyway sooner or later. Some crucial events in the world made it happen sooner. The first sign of the inevitable collapse was the news that Japan (the world’s second-largest economy, at the time) was going into recession. This led to panic selling in technology stocks, which were particularly vulnerable whichever way the worsening global economic climate would turn.
Some smart and quick-moving companies, such as Deli, realized this earlier than others: the market had reached its all-time high, and nothing good was on the horizon. So, they began to sell their shares. Other investors noticed this and followed, turning this trend into a snowball.
In addition, in 2000, the FED increased the key lending rate, which reduced investment capital. Amid these events, many investors began to realize that the lion’s share of dot-com startups had not learned how to generate profit.
After the bubble burst, many promising startups were left with no money. This sector of the economy was completely devastated. Even companies that actually could generate profits due to their efficient business models suffered enormous losses.
It took 14 years for the market to recover after the collapse. That is, people who bought stocks in March 2000 only reached zero net profits in 2014.
2022
To date, the corporate debt looming over the global economy has reached an all-time high totaling over $300 trillion. As of June 2022, total U.S. government debt reached $30.56 trillion, while intra-government holdings were just slightly more than $6 trillion.
The current system of capitalism does not work for the vast majority of people; it only serves some large investors, and now we’ll try to explain what that means.
It all started when state-owned banks around the world began printing trillions of dollars, hoping to jump-start the economy. Banks used this money to buy bonds, putting huge sums into the hands of large investors. These investors were supposed to spend the money and stimulate the consumer economy, which, in turn, would help create jobs. However, it did not work, and the reason is simple: the investors who received this money did not want to spend it, and instead preferred to reinvest it. As a result, they began to invest the funds received, pushing the market to new heights. While wages in the real economy were stagnating, stocks were hitting all-time highs before the coronavirus pandemic.
Today’s market movements depend on investors’ expectations from central banks (such as the FED) to make significant cash infusions.
There is so much money in the bond market that investors are willing to take fewer profits. As a result, many government bond yields have dropped to zero or even lower. There are many cases of negative interest rates in the EU, which means that the lender gives money and pays interest on it to the borrower. Investors are pushed into negative interest rates, earning fewer returns while still having a lot of money on hand. Thus, we have a scheme where capital circulates from banks to large investors and back, passing by ordinary people.
On top of that, today’s gap between the rich and the poor is huge, and this gap keeps on growing. Many experts believe the situation will only get worse because governments worldwide keep on borrowing huge amounts of money.
The Point of No Return
For the third year in a row, the world economy is undergoing a real stress test. In January 2020, the world faced a pandemic that turned everything upside down. Covid-19 paralyzed many sectors of the economy and forced billions of people to adjust to new living conditions.
Due to the pandemic, the economic activity of many states dropped for more than two years, which affected investment activity, employment dynamics, and the population’s well-being.
Two years of quarantine have passed, and the world has begun to gradually emerge from the crisis. But on February 24, for the first time since 1945, the world faced full-scale war in the heart of Europe. The economic consequences of the war in Ukraine are felt all over the world. Russian aggression has put pressure on global commodity prices, exacerbated disruptions in supply chains, and fueled inflation in most countries around the world. The world economy will lose a trillion dollars this year due to the invasion of the Russian Federation. This is evidenced by the calculations of The Economist
As mentioned above, inflation has become one of the main threats to many countries around the world. Even before the full-scale war in Ukraine, inflation was snowballing against the background of an imbalance of supply and demand, and the surge in the cost of raw materials.
We have to get used to inflation and all the troubles it causes because it will keep on increasing. In the USA, inflation has reached its highest level since 1982.
Besides the food and energy crisis, we may face a complete redistribution of markets on a geopolitical level. A “tectonic shift” of this magnitude entails increased volatility and long-term efficiency losses. It radically breaks supply chains and the rules of the global economy that have existed for the past 77 years.
Today’s crisis is much more severe than in 2000.
In the short term, the cryptocurrency market will follow the movement of stocks. Still, as the industry evolves and new uses appear, it has a chance to become an independent player. In any crisis, capital seeks a “safe haven” (precious metals, food, cryptocurrencies).
The whole world must understand: the sooner the war in Ukraine ends, the less medium-term and long-term consequences the world economy will face.
