Date created:22 January 2002
Last modified: 22 January 2002
Maintained by: John Quiggin
John Quiggin

Pop! There goes a trillion

Australian Financial Reviee

14 February 2002

One trillion US dollars. A million million. It's an unimaginable sum of money. It's more than the US would spend in development aid in 100 years, and more than enough to fix many of the world's problems once and for all.

Yet $US 1 trillion is a conservative estimate of the amount of real wealth that has been dissipated in bad investments during the 'New Economy' bubble of the last few years. (The paper losses associated with the NASDAQ boom and bust were even larger, but, since they represented the evaporation of fictitious gains, had little real economic significance.)

Of this massive total, about a quarter ($US 250 billion) went on dotcom startups and other attempts to reinvent economics using the Internet. Another $US 250 billion has been spent on attempts to turn mobile telephones into web browsers or data terminals, using technologies such as WAP and G3. More than $US 500 billion has been spent on broadband telephony and data systems, including the rollout of fibre optic cables and attempts to duplicate the services of local telephone companies.

The dotcom money is mostly gone for good. Six years after the spectacular Netscape float launched the Internet bubble, not a single pure Internet company has achieved consistent profits, let alone a commercial return to capital. (EBay reports profits, but they would be losses if the cost of stock options were counted). Around half the Internet enterprises launched since 1996 have closed down or sold up, and many more are on life-support.

The mobile telephony story is marginally happier. Between $US 50 billion and $US 100 billion was spent in auctions to buy telecommunications spectrum that is now worth only a fraction of this sum. This was simply a transfer from shareholders to national treasuries, in many cases reversing the earlier impact of privatisations at giveaway prices. And not all the physical investment has been wasted. There are even a few success stories, such as Japan's DoCoMo.

The biggest, and most complex, case is that of broadband. Despite massive investments, residential access to broadband has remained both spotty and unreliable and has regularly been interrupted by bankruptcies of carriers, wholesalers and service providers. There is huge overcapacity in fibre optic cables. By some estimates as much as 97 per cent of fibre currently installed in the US is 'dark', that is, not in use to transmit light signals. Most will never be used. Meanwhile, attempts to wire up the 'last mile' separating homes from the network have floundered in a sea of recriminations between the competing enterprises that must co-operate if the service is to be supplied.

The most spectacular failure of all (so far) has been that of Enron. The downfall of a company repeatedly voted 'America's most admired' can be traced, appropriately enough, to an Internet operation devoted to trading broadband capacity. Attempts to shift the resulting losses off the balance sheet set the scene for the 'death spiral' that began last October.

Australia, noted as a leader in telecommunications deregulation, set the pattern in the early 1990s. Following the ludicrous auction for pay-TV rights, where the 'winners' were bogus bids from $2 companies, as much as $A8 billion was spent on providing half the country with two sets of parallel pay-TV cables, while the other half got nothing. Possibly because of this chastening experience, the losses in later fiascos such as OneTel were modest by world standards.

What can we learn from all this ? First, there is a lesson about human nature and hubris. Having been anointed as 'masters of the universe' and rewarded accordingly, financial market operators and corporate CEOs promptly set about grandiose projects and destruction of wealth comparable to that of Ceausescu or Mao-Tse Tung, but on the larger financial scale of the world economy. Social democratic government never aspired to this kind of power, or wasted this kind of money.

At a more prosaic level, Keynes' observation that it is folly to base major investment decisions on the operations of a casino has been amply confirmed. Publicly-owned statutory authorities like the old Telecom made mistakes, but they succeeded in their basic mission of providing Australia with high-quality infrastructure on a nationwide basis and at reasonable cost.

Today's 'New Economy' enterprises have been purpose-built for the mission of enriching their managers and the financial insiders who put them there. They have succeeded admirably in this mission. Everyone else, including workers, consumers and small shareholders, has lost out.

Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.

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