Meta Platforms Inc., which owns Facebook, crashed at least $195 billion in value on Thursday. Does this harbor a major tech market correction on the level of the massive selloff in 2000–01, called the Dot-Com Bust?
All markets have booms and busts. It’s part of the capitalist system. Socialists like to criticize the boom-bust cycle, but whenever they came to power, they brought mass starvation, as in the Soviet Union or Maoist China. The best one can do is prepare for the inevitable busts. In particular, governments should not spend too much during the booms.
In the late 1990s, in the Orange County Register, where I wrote the state editorials, I warned over and over: “The business cycle has not been repealed.” Gov. Gray Davis and the Democratic Legislature didn’t listen.
The money kept pouring into state coffers from Silicon Valley. The state boosted general-fund spending from $57.8 billion in fiscal 1998–99 to $78.1 billion in 2000–01. In just two years, that was an increase of $20.3 billion, or 35 percent.
It couldn’t last, and didn’t. The Dot-Com Bust hit from 2000–02 and wiped out scores of companies, including Pets.com, Webvan (early home delivery) and Worldcom. Cisco’s value plunged 86 percent, but it survived. The NASDAQ crashed 78 percent.
California’s government racked up $40 billion deficits, which led to spending cuts and tax increases. The crisis played a big part in the 2003 recall of Davis, as did the 2001 electricity crisis and his unilateral increase in the car tax without legislative approval. Campaigning for governor during the recall, Arnold Schwarzenegger decried the “crazy deficit spending” and pledged to “blow up the boxes” of state bureaucratic waste.
Arnold himself repeated the crazy spending just before the 2007–10 subprime meltdown, leading to another cycle of massive deficits and tax increases—but that’s another story.
Switch to 2022, and on Jan. 10 Gov. Gavin Newsom proposed a budget for fiscal year 2022–23, which begins on July 1, of $213.1 billion. That’s a $48.1 billion increase, or 29 percent, from the $163.5 billion of 2020–21, just two years ago. Not quite Davis’ 35 percent increase, but close.
There are some differences from 23 years ago. Now the state has a Rainy Day Fund, which Newsom’s budget pegs at $20.9 billion. Plus $9.7 billion in the Public School Stabilization Account; $900 million in the Safety Net Reserve; and $3.1 billion in the state’s operating reserve. Total: $34.6 billion.
The governor also warned, “A stock market reversal could lead to a substantial decrease in revenues. Given the state’s history of boom and bust cycles, additional deposits into the state’s reserves would further prepare the state for future economic slowdowns. However, deposits into the reserves count towards the State Appropriations Limit. Therefore, any additional deposits would have to be carefully balanced against other spending priorities.”
If a recession is mild, the state probably could survive it fairly well. But if it’s severe, all bets are off.
There’s something else different from 23 years ago: The rise of China as a tech rival, in particular TikTok. According to Variety, in a Q4 earnings call, Meta CEO Mark “Zuckerberg called out the short-form video app as a meaningful competitor, mentioning TikTok five times on the call.”
You might remember in 2020 President Trump banned TikTik as a security threat because of its close connections to the Chinese Communist Party dictatorship, although the ban was held up in courts and never enforced. Last June, President Joe Biden reversed the ban.
If Chinese companies linked to the CCP keep taking over American companies’ space, then Silicon Valley could face serious problems. It long ago sloughed off manufacturing to China. That’s why many Apple devices read on back, “Designed by Apple in California / Assembled in China.” But what if design comes from China, too?
Then again, maybe all will be well. We might not have a Dot-Com 2.0 in the near future, or it could be mild.
But my longtime warning remains: The business cycle has not been repealed.
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