Is The Tech Economy Going to Crash?

As we move into 2008, we are seeing more and more stories about the slowing U.S. economy. In the tech blog world, I am seeing stories on both sides of the issue: some saying we’re in for a tough recession and others saying 2008 is going to be hot for tech. Which is it?

This is a matter which affects everybody and that is why I will talk about it here. Don’t worry, I’m not going to get into uber-complicated economics.

Why a Recession At All?

Most economists will tell you that the economy is a constant stream of ebbs and flows. This is true. We have seen a long period of growth for the U.S. economy, so as the pattern goes, we should see a period of cool down for a little while. But, is that all there is to it? Not quite.

There are a variety of factors which could lead to this slowdown:

  • Slowing mortgage market. During the real estate boom, we saw a lot of people getting home mortgages who had no business getting mortgages. They were buying homes they couldn’t afford due to the predatory lending practices of some banks offering sub-prime mortgages and interest-only loans. As people’s adjustable-rate mortgages adjust upwards and banks feel the heat of the trap they put themselves in, we are now seeing high numbers of foreclosures. My neighborhood alone, here in Florida, has at least 20 vacant homes. We’re also seeing banks with financial problems getting foreign investment to stay afloat.
  • High Personal Debt. Too many Americans are living beyond their means and using credit to do it. People insist on a millionaire’s lifestyle when they don’t have that kind of money, and they bury themselves in credit card debt, car loans and high mortgages. If the banks start to feel the heat of all of this, they’re going to increase interest rates. That means people are going to be buried in more debt than they have the capacity to pay off.
  • High government debt. I don’t care if you’re a Republican or a Democrat, like Bush or don’t, the truth is that President Bush has spent this country into the money pit. Don’t think for a second that high government debt is not a problem for you. If you look at the U.S. National Debt Clock, if the federal debt were split up amongst every citizen of the U.S., each person’s share of the debt would be over $30,000. Bush is not to blame for this, but he sure has made it much worse. And if the Democrats come to power in 2008, promising even more government programs and the granny state, this problem is going to get even worse than it is now.
  • High oil prices. We’ve all seen that gas is a lot more expensive. That is a contributor to a slowed economy.
  • Inflation, Dollar Devaluation. The dollar is becoming increasing LESS valuable on the world scene. This was caused by Fed overproduction of money (money which is not backed on anything but consumer confidence) as well as massive increases in government debt. The problem is that most of the crude oil purchases are done in dollars, so as reduced dollar value means even higher oil prices. A smaller dollar also decreases foreign investment here in the U.S.. It is also going to increase the desire for Americans to invest overseas rather than at home.
  • Self-Fulfilling Prophecy. Despite all the reasons above, the U.S. economy is very resilient and always has been. Problem is that many in the media have been talking about recession. This affects consumer mindset and, in a way, helps bring it on as inevitable.

I’m already seeing signs of slowdown. As I said above, my neighborhood here in Tampa Bay has at least 20 vacant homes. Some are in foreclosure. Some were purchased by investors thinking all they had to do was buy a home and resell it and they’d strike it rich. Instead, they now find themselves with a home they can’t afford and, if sold, would go for much less than they paid.

What About Technology?

Tech has seen it’s share of ups and downs. The famous 90′s boom led to a massive crash in technology as we moved into the new century. It was not enough to cause a massive slowdown of the whole economy, but it did cause an economic dip right around the time President Clinton was leaving office.

Today, some are saying we are in another tech bubble. The whole Web 2.0 phenomenon has led to a lot of tech startups and venture capital investing. We’re also seeing new services come in with HIGH dollar valuations. Companies like Facebook, Youtube, Google and others all demand very high dollar values. We see all kinds of new web-based services popping up, all with the infamous “beta” logo and nice bubbly buttons. Certainly there are parallels to the 90′s tech bubble. Are we going to see another crash?

My View On the Economy

I think that the U.S. economy has already begun a slowdown which is going to be a recession in 2008. I think this slowdown could perhaps we worse than we’ve seen in some time. The younger generation who has known nothing but good times could be surprised by it. Many will, for the first time, be faced with operating on slimmer budgets.

The massive debt, both on a federal and personal level, is going to catch up to us and is beginning to do so now. Americans are stereotypically short sighted, and I believe many have been when it comes to their use of credit.

This is not a death knell for the economy by any means. The economy has to lose some dead weight, but the American economy is very important to the entire world and that isn’t going to change anytime soon.

As for technology, I think it very much depends on consumer mindset. There is no doubt that the world revolves around technology and IT today. That isn’t going to change and for that reason the world of tech and IT isn’t going anywhere. People who work in IT will be in demand. Hardware will always be in demand. Gadgets will be in demand. The Internet will remain integral to our daily lives.

My own view is that the tech economy will take a hit only to the degree that people don’t think they have as much residual income to buy things they don’t really need. Aside from that, my view is that any company in technology which concentrates on delivering real VALUE to the consumer will be fine and can even grow despite of a slowing economy.

The U.S. economy is very much knowledge-based. In many ways, we’re the brains of the rest of the world economy. While some segments of the economy will drop or shift overseas, I think the world of technology is in a position to weather it out.

Your Part, What You Can Do

There are a few things I think people can do in their own lives to be prepared:

  1. Do whatever you can do pay off debts. If you get excess cash in hand, don’t go spend it on more crap you don’t need. If you have debt, pay it off first.
  2. Be Responsible With Your Vote. I’m certainly not going to tell anybody who to vote for. I don’t even know who I want in there yet. But, what I can tell you is to pay close attention to the candidate’s mindset in terms of government spending and the economy. If the candidate is proposing more government programs or bail-out programs, it would be very unwise to vote for them. Those things only increase the government debt. Ill-informed Americans think these things just come free to them. It couldn’t be any further from the truth.
  3. Don’t Watch The News Constantly. I’m a firm believer in the fact that economic forecasts tend to bring on what they predict. I think there is a big difference between being realistic (as I have tried to do here) and being overly alarmist. Some in the media like to be alarmist in order to boost their ratings and freak out the audience so they’ll pay attention. Unfortunately, that works, but it also leads people to think things are a lot worse than they really are.
  4. Invest in gold. The American dollar inflates wildly because it is not backed by anything real. Gold and silver investment, though, is real and is never going anywhere. This makes such investments wise ways to allow your wealth to weather fluctuations in currency.
  5. Expand Your Knowledge. If you know all about a particular thing, that thing cannot come back and bite you in the ass. The more you know about the world, whether it be in tech or not, the more protected you are and the more valuable you are.
  6. Flourish and Prosper. Above anything else, you should disagree with anybody saying everything is crap and, instead, concentrate on improving your own economy. There is always money to be made out there.

With that, I’ll end my temporary detour from pure tech.

Comments

  1. Good article Dave. Very informative and seems to sum up the current situation very well. Thanks for that.

  2. Justin Hitchborn (hitchface says:

    Well written, especially the segment about loans, mortgages and debt. People do spend themselves into a hole. Irresponsible spending and lives of excess are what characterizes the West, and distinguishes it from the rest of the world. Many of the people reading this have houses up to 10 times bigger than that of an average Latin American family, with half of the family members.

    One example, but the situation doesn’t change much around the world. We get ourselves into this problem.

  3. Vic Richards says:

    A good common sense article Dave,unfortunately it is
    the same here in Australia and I suspect in most parts of the world.People have lost touch with reality,especially
    money values.America’s huge loss has been Iraq.

  4. james jackson says:

    Well written and informative, what else needs to said?

    You can not spend what you do not have forever. That was the message I got.

Leave a Reply