THE MENTOS ECONOMY By Michael S. Malone
The events of this week on Wall Street and across the world’s financial markets hit with a sickening thud out here in Silicon Valley.
Like everyone else, we are worried about bank closings, foreclosures, the bankruptcies of major investment banks, a falling stock market and, closer to home, losses to our own investments and 401Ks.
But here there was something else as well: in many important ways we are still recovering from the bursting, in 2000, of the last great Bubble: the dot.com boom. Certainly we recovered more quickly from that crash than we ever thought we would – and indeed, we’ve had good times here in the Valley over the last four years. But whatever success we’ve enjoyed has been tempered by the fear that it could all disappear overnight – just as it did when several thousand new Internet companies (and hundreds of thousands of jobs) evaporated in March of that year.
This has been a nervous decade in Silicon Valley. For all of the successes of both the established giants like HP and Intel and of the hot new Web 2.0 companies like Facebook, we still tread lightly, as if on thin ice. For a community famous for only looking forward, we nevertheless find ourselves constantly glancing back at those terrifying and depressing first years of the century. And you see that nervousness reflected in everything from venture capital investments to the construction of new facilities. For all of the billions in fortunes made around here in the last four years, Silicon Valley still seems gun-shy.
Needless to say, since the dot.com Bust, the U.S. has seen several other overheated industries that could best be described as economic Bubbles, from housing prices to, in our own backyard, social networking companies. In fact, it’s hard to remember a time in this decade when we haven’t been experiencing either over-exuberance or collapse in one industry sector or another, or when some massive fad – American Idol, anyone? – has held the country in its thrall.
I’m old enough to remember when economic Bubbles were something you read about in history books, an indelible experience – like the Roaring Twenties — recounted by old folks from their own childhoods; an event that came along every couple of generations and led to international catastrophes and war.
But since the 1997 Asian Financial Crises – maybe even since Black Monday in 1987 — it seems that we have been living a world where Bubbles and Busts are no longer anomalies, but the norm. This week’s subprime mortgage crisis may continue to chain react, pulling down one financial institution after another until it sinks the world economy into the black hole of another Great Depression . . .or just as likely, we’ll muddle through once again, take our losses and keep roaring on.
I’m betting it’s the latter, and that a couple years from now a new economic Bubble will erupt in some other part of the economy, suck millions of people and billions of dollars into its thrill ride – and then burst in yet another supernova crisis that will fill the headlines and lead to calls for the federal government to intervene.
If this is the case, then it’s time we stop treating these Bubble/Busts as isolated events, and begin asking ourselves: Is this the new reality?
Call it the Mentos Society.
We’ve all seen the YouTube videos: you take a couple of the chewy Dutch candies and drop them into a bottle of Diet Coke or other soft drink – and instead of a small splash or a slight fizzing, you end up with a towering fountain of foam that blasts most of the contents of the bottle a dozen feet in the air. The WOW factor in this pseudo-science experiment is the amazingly disproportionate response to what seems like a minor event.
What scientists tell us is happening is that because the soft drink is carbonated it is perpetually in a state of high surface tension – which is why your drink blows its top when you smack the side of the bottle. At the same time, the Mentos candy has numerous microscopic dents on its hard surface, which are the perfect sites for ‘nucleation’, in which the carbonation rapidly forms into bubbles. Put the two forces together and all hell breaks loose.
I can’t imagine a more perfect analogy for the current U.S. (and world) economy. Thanks to the digital and communications revolutions we live in a culture of tremendous, and unprecedented, volatility. A new idea, fad, urban legend, piece of fake news, virus, or meme, can pop up almost anywhere and within minutes circle the planet. This is the perpetual fizz that often makes daily life these days seem so overwhelming, frenzied and just plain crazy. In the course of an hour we can find ourselves up in arms about some piece of ‘news’, read a dozen entries by angry bloggers who share our views, sign on-line petitions and post comments on a dozen news sites . . .and find out a few minutes later that the story wasn’t true after all. By then, another story has erupted.
Add to this the fact that the United States (and again, much of the rest of the world) is becoming increasingly entrepreneurial, a nation of free agents. Now, for every one of this new fads or opportunities there is a small army of entrepreneurs chasing it. And chasing them are investors, shareholders, financial institutions and vendors, distributors and retailers. Meanwhile, thanks to the Web and large databases, it’s possible now to jump all of the requisite hurdles (applications, credit checks, etc.) to get investment capital, incorporate and start buying and selling in a matter of minutes or hours, instead of weeks or months.
The result is an economy saturated with individuals and institutions ready to coalesce, almost instantly, around any perceived financial or emotional opportunity.
Now, throw into this pressurized, explosive brew some little kernel of that opportunity, especially one that offers millions of people the chance to quickly and easily attach themselves to it. . . like easy mortgages for traditionally unqualified homebuyers, or easy venture money for anyone wanting to start an e-commerce company . . .and BOOM!
Please note that none of these underlying factors is going to go away. On the contrary, everything is only going to get faster, smarter, more entrepreneurial and more volatile. That may mean that some big Crash is waiting for us out there someday in the future – or more likely, it suggests that we are entering into an era of perpetual Bubbles; which, like their Mentos-in-Coke counterparts, will typically produce enough short-term pay-off to counter the mess and clean-up afterwards.
Want to win the Nobel Prize for Economics? Figure out how the Mentos Economy works and how best to handle – other than emergency bail-outs and other forms of creeping socialism – the aftermath of all of those bursting Bubbles.
Or better yet, figure out how to make money off of it . . .and millions of us will quickly rush forward to invest in you.