How '90s Internet Destroyed the Economy | The "Dot-Com" Bubble
- [Host] The 1990s were a magical, optimistic time for technology. The Cold War was over, economic opportunity was booming, and it appeared as if we were finally on track to achieving world peace. (inspirational music) The future was finally here. Although these were factors that primarily applied to the United States, their effects were also felt worldwide. Thanks to a new technology, which quite literally, connected all of us together and manifested an attitude which hadn't really existed prior at such a large scale, the ambition to change the world. ♪ On your mark, get set ♪ ♪ We're riding on the internet ♪ - [Host] You may have been born too late to explore the Earth, and too early to explore the universe, but don't fret.
There was now a whole new world out there that remained largely untouched. The cyberspace. You just had to dial in (keypad beeping) and yeah, you were there, (telephone ringing) eventually. Travel would now be for pleasure rather than necessity. You could meet (keyboard clacking) whoever you want, be whoever you want instantly and with just a click of a button.
- I'm perfectly serious when I suggest that one day, say that year 2000, we may have brain surgeons in Edinburgh operating on patients in New Zealand. - Much like the vasts unending space to the internet itself, people felt there was no limits to what their capabilities were. And naturally, hundreds then thousands of websites would pop up, providing services for just about anything.
Venture capitalists were all over it, throwing money at just about anything that ended in dot com, taking the already flourishing economy to limits that were beyond comprehension. For the first time, anything was possible, and any opportunity was good opportunity. But what happens when you take this too far? What followed would be an economic disaster of global proportions. As much as $5 trillion lost, thousands of businesses now bankrupt with very few survivors left over, and a recession has formed.
The once booming, seemingly unstoppable force of the worldwide web, now returning to the valuations it had before its commercialization in 1995. Perhaps this wasn't a new medium for achieving the American dream. But instead, just an economic bubble. (keyboard clacking) The Dot-Com Bubble as it would soon be coined. The entire ordeal showcased that this new cyberspace was really just a continuation of the real world and its very real problems, rather than some utopian escape from it.
It was the illusion of success and a false pursuit of happiness that led to such devastation, which left people no other choice than to lose most of their trust in this new digital realm, instead of, you know, looking inward. But what do these things entail, in retrospect, avoiding the catastrophic results of the Dot-Com Bubble seems very obvious. How could some of the brightest investors in the world make such ridiculous decisions? Did people really not learn from the mistakes of the past? What's interesting about the Dot-Com Bubble is that it does share many parallels to the economic crises that have surfaced throughout history.
But just like the internet itself at the time, was something new and faced problems that hadn't existed before. And these problems were intensified by a sensationalized yet uncertain outlook on the future. So what was the strange tale of the Dot-Com Bubble, and how do we prevent something like it from ever happening again? New setting for now. Now life can be stressful, especially in my case, for the past couple of months. Just dealing with stuff, it has been stressful. It's been hard to stay focused.
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Now, the science and art of economics can get very, very complicated. Something I cannot fit into just one video. And even though I studied it in college, there's still a lot about it that I don't know. But thankfully, the foundation, the root of how an economy works is very simple to understand. And that is all you really need to know to see the big picture of the Dot-Com Bubble.
You most certainly already know how an economy works at the fundamental level. We, as society, agree that all things have a certain value, some things more than others. We have collectively decided that green pieces of paper (audio pops) with a president's face on it, have the monetary value of whatever number is printed in the corners. And we trade those pieces of paper for products or services (audio pops) that we have agreed are worth the same amount. Let's say you own a bike (audio pops) that you think is worth around $100. If a person who is looking to buy a bike also agrees that it is worth $100, they will give you $100. (audio pops)
And yeah, that is quite literally it, and that is how a global economy runs. We even see this occur in nature. Crows will often give people rocks, or even things like lost car keys in exchange for food. The concept of value is completely arbitrary, a social construct, but it is something also ingrained into life, and it kind of has to be. We have made it an integral part of our world because it is the only thing that provides an incentive for cool things to continue being produced, cool services to continue happening, and quality of life to continue increasing.
It is what makes life worth living. But you know what would make life even better? Is if we made our economy a lot more flexible. Everyone's income and life situations are different after all.
Say you only have $50 and want to buy my bike, well, no worries, I'll give you the bike now and I'll give you a whole year to pay the rest of what you owe to me in small installments. But since you're kind of inconvincing me with this, I'm going to add another $12 to the remaining 50 that you owe me. This practice is called buying something on credit. And this added on money is called interest. Again, there are a million other things in our economy that make it much more flexible than just these things. But these are the main takeaways you really need to know to understand how something like the Dot-Com Bubble could have even happened in the first place.
And the best way we can use these concepts in real world examples, is by looking at the economic disasters of the past. Let's take a trip back to October of 1929, the start of the Great Depression of the 1930s. ♪ Blackbird singing the blues all day ♪ (fingers snapping) (fanfare music) - Now we're setting the mood here. Damn, Downtown Abbey. Cousin Matthew, I'm on my way to steal your girl, who is also your cousin, because it's the '20s. Totally didn't steal that joke from another creator.
Only original content here. Boardwalk Empire can't come to the phone right now because she's dead. I killed her. What was I talking about? Great Depression.
Now, the Great Depression is going to be its own separate video, so I'll be omitting a lot of details here for the sake of time. And I'll be using the United States specifically as an example. But in short, World War I increased productivity of war materials. Henry Ford's innovation of the assembly line made this productivity grow at a rapid rate. And when the war ended, the US had the benefit of being on the winning side and not suffering as many casualties during the war compared to everyone else. So they could now use these factories to create non-war materials, AKA, fun stuff.
More factories meant more employed people, and therefore more people with money. So this, in addition to the US receiving tons of money from European debtors following the war, they had a lot of money and a lot of supply. People could buy more nice things for themselves than ever before. They were called the Roaring Twenties for a reason. It was a decade of economic prosperity.
Well, sort of. You see, a lot of the Roaring Twenties was actually a bit of a facade. As F. Scott Fitzgerald described it,
the 1920s was the most expensive orgy in history. And this was because of a practice that would become one of the big causes of the Great Depression. The decade's popularization of credit. Buy now, pay later was the mantra.
People were buying things they could not afford. Paying it all off in installments rather than just all at once. People making minimum wage (audio pops) were now buying Model Ts. This created the illusion of wealth. People were even buying stocks on credit. And when you have too many people getting really big loans from the bank, bigger than they can afford to pay off, the banks eventually run out of money.
And because all these people (audio popping) were living beyond their means, they can't afford to pay the loans back. Everyone loses, the stock market crashes, and the most devastating economic crisis in modern history follows in the 1930s. (fingers snapping) But with the Dot-Com Bubble in the 1990s, you basically have the same problem, but in reverse. Spend a lot of money right now, get what you paid for later. Now, who on Earth would do a ridiculous thing like that? Well, let's take a look at the economic state of the 1990s. The decade started off with the 1990 to 1991 recession.
Although not the most devastating thing in the world, by the middle of the decade, the United States Federal Reserve wanted to prevent further trouble. So, they decided to lower interest rates in order to increase the borrowing and spending of money, and in turn encourage economic growth. So, thanks to an all-time low in interest rates and capital gains tax cuts, (audio pops) things were much cheaper, which meant investors had more money, well, to invest. And the more excess cash people have, the more likely people are to make rather risky investments. But the question was, what were they going to invest in? Well, it just so happened that the '90s were the decade of technology.
Personal computers were getting exponentially more powerful and cheaper, and the percentage of households with computers was only snowballing since the start of the decade. And of course, when Windows 95 would come out, this would just go berserk. Microsoft's new OS made personal computers so much easier to use than ever before, and at an affordable price. But something else also happened in 1995.
The internet officially became commercially available to the public. Very soon after, just about everyone (audio pops) had a computer (audio pops) connected to the internet. (audio pops) Much like Windows 95, the worldwide web was now easier to use than ever before, thanks to a new browser called Netscape Navigator. It was the most reliable web browser when it came to loading text and graphics on a page at the same time, which was what made it become so popular. And Netscape would do something that would start a trend in the online world. It would go public (audio popping) on the Nasdaq.
Despite just being nothing more than a computer program, investors saw that the internet was the future. And with the excess cash that they had, they were more willing to take some risks. So basically, you have all these investors just throwing money at Netscape, and its share value ends up going to record high levels in just the first 24 hours. Seeing the monster success that Netscape had on the stock market, they didn't wanna stop there. Because the internet was so easy to use now, naturally, websites were popping up left and right, providing all kinds of services, online bookstores, online garage sales, website builders, internet directories, online pet stores, et cetera. And all of these websites wanting to get these same success Netscape did, also went public, and they too just blew up.
It was getting to the point where just about any name with dot com at the end of it was just getting all in. Again, reaching share values that had never been seen before. But how do you determine value? Well, it is measured based on whether the price of something is elastic or inelastic. If something is priced elastic, that means the price can only reach a certain limit before people decide whether or not that investment is worth it. If Apple decided to make their MacBooks insanely cheap, they would start selling like hotcakes.
But if they decided to make them outrageously expensive, ew, no one would buy it. Something that is priced inelastic doesn't really have this problem, at least not nearly to the same degree. This means that no matter the price of the product or service in question, its demand isn't really affected much. A good example of this would be insulin. You cannot put a price on human life, so people will pay whatever it takes to get it to keep themselves alive.
In an attempt to be as apolitical as possible, this is a big reason why the US healthcare system is so terrible. Corporations are well aware of this, so they set the prices insanely high because they can. It is a system that is far from perfect, but it is one that has been able to work for the past couple hundred years, as long as there's some kind of balance, just like with everything in life. But when this balance gets skewed, things can go awry. And dot coms are elastic. The price can only get to a certain point, and investors didn't take that into account.
Like we said, this was basically what happened in the 1920s but in reverse. So how did investors not catch onto that? Aren't they smart enough to know not to repeat the mistakes made from history? Well, that wasn't really their concern, because they were exhibiting something that I like to call digital myopia. Where investors and business owners focus on the short-term growth of a business rather than the long-term. Something typically associated with high-risk investments. Basically marketing myopia, but in the cyberspace.
And a dot com is different from a traditional stock. It is a speculative investment, at least it was in the '90s. Because websites are digital, they don't necessarily need multiple office buildings or have to hire tons of employees making their business expenses much smaller, as they only need to focus on hosting costs. This makes the value of their business much more difficult to measure.
That's the thing with speculative investing. Its value relies on subjective opinions and hunches rather than objective factors that can be measured such as the business's productivity, the quality of their products, et cetera. It is the same thing with people who invest in paintings.
It is a legitimate investment, but a lot more volatile. The only reason an Andy Warhol painting is worth tens of millions of dollars is just because people love Andy Warhol. It doesn't get deeper than that.
Dot coms in the nineties had the exact same problem. They were only valuable because investors want it all in on the internet. And the success of Netscapes going public reinforced that. And the problem with speculative investments is that the higher the return, the riskier the investment is.
In other words, you either gonna make a ton of money or lose a ton of money. That is why speculative investments should be done in moderation. With non-speculative investments, you are much less likely to lose a ton of money, but it takes longer to make a return. - Get rich quick schemes never work. - This is why retirement accounts often take entire lifetimes to make an impressive return.
They are often investing in more secure things such as bonds, the S&P 500, things like that. Because the internet was so new, there was nothing really to compare it to. So a lot of these investors just thought that the mistakes of the Great Depression would just not be applicable in this case. Like we mentioned, the more money investors have, which was the case in the '90s, the more likely they are to partake in speculative investing. Heck, it's also why Beanie Babies were a thing back then, but that's for another video.
Measuring the value of an online business in the '90s was not impossible. The approach was just different because the internet was different. But even then, investors just didn't care.
They saw dot coms as this gold rush, and they put all their eggs in one basket, completely ignoring all rationale, and were instead purely motivated by overconfidence fueled by media sensationalism, and a false perception of what the internet was becoming, this moneymaking machine. But for the first few years, numbers were going insane. Some dot coms having their value increase as high as 700%, and that can be great and indicative that you have a product or idea that's very promising. But you should also be careful. If something grows much higher than its intrinsic value in a relatively short amount of time, you may have something called, you guessed it, an economic bubble.
And as Tears For Fears once said, nothing ever lasts forever. You can't keep interest rates low all the time. If they are low for too long, you can have too much borrowing and spending in an economy, and then demand gets bigger than supply. This causes prices to go up, and now you have inflation.
More inflation than you want. To combat inflation, you have to raise these interest rates up, which is exactly what ended up happening by the time the millennium came around. In addition to people overspending on upgrading to Y2K-safe equipment, investing decreases, demand becomes higher than supply. And when that supply eventually runs out and assets appreciate beyond what is realistic, that excess money that investors have is then lost.
And nearly all those dot coms they invested in either had unrealistic business models or no business models at all. An example of this would be pets.com, an online pet store that spent more money on advertising its mascots, than actually figuring out a way to make shipping costs cheaper than just going to the local pet store and buying stuff in person.
These companies had nothing to show for themselves to justify their insanely high evaluations. People began to panic sell, and these websites values subsequently went down, and eventually, they just disappeared, and so did all the money invested into them. The bubble has now burst. March of 2000, the NASDAQ Composite Index would reach its peak. And then just completely deflate going forward at insane levels. So quite literally, individual websites went from being worth hundreds of millions of dollars to nothing, all in the course of around six years, with only a handful of them surviving.
And as for Netscape, well, Internet Explorer would eventually take over, which would cause it to dissolve completely causing its entire stock journey to be completely in vain. Many people lost their entire retirements by exclusively investing in dot coms. And other tragic events would add insult to injury such as the fall of Enron, one of the leading energy companies in the United States, and the September 11th attacks. Now, why would domestic terrorism somehow make internet investments less desirable? It seems like a complete non sequitur. Well, they are indirectly related.
Following the attacks, the stock market closed for four days due to the devastating damage to Manhattan's infrastructure. This would create a sort of domino effect and eventually affect other financial markets, making the economy even more devastated than it already was. If you would like to learn more about the World Trade Center, I have an entire video about it, which you can find linked on this video. The early two thousands were then met with quite a pessimistic outlook on dot coms as a viable business.
- Well, there was some unpleasantness. (chuckles) He quit a government think tank to start a dot com. (group groaning) - (whistling) One time net worth 200 million, now $137. - It's really not all that different from the way people look at cryptocurrencies in more recent time. Not all crypto investments are bad, but a lot of them are. So its reputation is now tarnished.
It was the same thing for dot coms. And you could make the argument that this wouldn't really change until the internet would prove itself to be more useful with the rise of social media, streaming, and other things that actually are less speculative and more convenient than the real world. It was only then that the internet finally got the reputation that it's so desperately wanted in the '90s, but this time, with much more understanding. So in that way, the Dot-Com Bubble was a bit of a learning experience. We shouldn't make life-altering decisions based on things we know nothing about.
And we most certainly shouldn't rush those decisions. We need to be patient, and to better understand what we are getting ourselves into. That is the only way we can ensure that we have a better future.
Thank you so much for watching. If you enjoyed this video, please subscribe and click the notification bell so that you never miss a future video.
2023-08-09 01:02
