Investing Our Way To Poverty
Jerry W. Thomas, President & CEO, Decision Analyst
It’s surely un-American to question the huge flows of investment money flooding into technology firms and high-tech startups. After all, it seems like all of these high-tech investments would stimulate a high rate of economic growth in the U.S.
True, some of these investments have created spectacular companies (Google, Amazon, Facebook), and some of these investments have earned fortunes for their masters and their investors.
But are all of these investments in high tech really paying off? Are these ventures really stimulating economic growth in the U.S.?
Since the Great Recession reached its trough in 2009, the U.S. economy has “recovered” at the slowest pace on record, despite the massive investment flows into high-tech firms. Right now San Francisco and Silicon Valley are booming from all of this high-tech investment, but most of the U.S. continues to languish. Could a factor in this slow recovery be the tremendous flow of speculative capital into high-tech firms and startups, where rates of return are increasingly marginal?
A good example of this excessive speculative investment is represented by “big data” and “analytics” startups. The business news reports almost every day the launch of another big data or analytics firms with funding of $5 million, or $10 million, or $50 million, etc. The market for business analytics is large and growing, but the market for these types of firms is not infinite. Most of these operations will go belly up because the market cannot support such a proliferation of redundant businesses.
We are in the midst of a big data and analytics bubble. The enthusiastic investors in these high-tech startups -- mostly private equity and venture capital firms -- don’t realize they are racing down a one-way road to oblivion. Soon, however, the folly of their enthusiasm will become evident.
This big data and analytics bubble is a concrete example of the types of speculative investments encouraged by the Federal Reserve’s ultra-low interest rate policy. In fact, throughout recorded history, extremely low interest rates have always tended to encourage speculative endeavors -- as investors seek to earn higher rates of returns on their money.
What might be the reasons that these speculative investments do not drive overall economic growth in the U.S.? One reason is the disruption caused by technology itself. New systems, new software and new equipment take time to learn and implement. For example, Microsoft’s introduction of new Office software every couple of years creates a massive retraining cost for its customers. The retraining costs probably offset any productivity improvements in Office software itself. New technologies are often not as productive in their early stages as the technologies they are replacing, and it takes time to realize productivity gains from new technologies. So if new technologies are introduced too fast, they can actually cause a reduction in productivity and a negative effect on the U.S. economy.
Also, high-tech startups and technology investments are made with “free money” from Wall Street, driving up salaries and pulling employees from existing companies -- another negative effect on the overall economy.
Very often new high-tech jobs are marginally productive, certainly in the near-term. This shifting of employees from highly productive jobs into marginally productive jobs at higher wages is not a prescription for economic growth.
The last reason is the herd effect. Money is pouring into high-tech ventures because they are receiving so much coverage in the news, on blogs, at conferences, and in business publications. With so much press, potential investors are lured into believing that big data and analytics represent some magical cure for what ails corporate America and modern society.
So here we sit in the center of another high-tech bubble. Wall Street continues to pour money into these ventures, inflating the bubble. Someday soon, however, a sudden rush of air will announce the bubble is no more.
The ultimate solution to excessive speculation is higher interest rates. That will weed out the marginal high-tech and non-high-tech investments, and it will force all investors to think more carefully about where and how they place their bets.
While it seems strange and perverse, higher interest rates might actually contribute to higher rates of economic growth, as marginal investments (speculations) are squeezed out by higher interest rates.
About the Author
Jerry W. Thomas is president and chief executive of Decision Analyst (www.decisionanalyst.com) a global research and analytical consulting firm specializing in strategy research, new product development, advertising testing, and advanced modeling for marketing decision optimization. For more than 35 years the firm has delivered competitive advantage to clients throughout the world in the high technology, consumer packaged goods, retail, medical, automotive, and other industries. Jerry welcomes feedback and suggestions at 817-640-6166 or email@example.com.