THERE IS a sort of relief that comes when a balloon blown up too far finally pops; a release of all the tension that builds up in the wait for the inevitable bang. Watching the markets, especially those dominated by New Economy shares in internet, computer and telecommunications companies, has been just like that for the past year or so. Now, at last, fear is beating greed.
The fact that the current share price bubble had been expected to burst for so long marks a big difference between events of the past week or soand previous collapses. The crash of October 1987 had few prophets, whereas April 2000 - if indeed it turns into a fully- fledged crash - will have had many. So far the daily drops in share prices have not been as cataclysmic as those in 1987, when Wall Street fell 20 per cent on "Black Monday". Nor did shares then show any tendency to bounce back after a bad day as bargain hunters piled in to the market.
Still, the Nasdaq index in the US, covering the world's leading New Economy companies, has lost a third of its value in just over a month and 25 per cent in the past week. The judgment of a US court against Microsoft just over a week ago was one trigger. The other was news on Friday of an unexpected rise in US inflation.
These are dramatic falls, demolishing paper fortunes, even though they only reverse the previous two months' gains.
Investors who waited until this year to buy into the dream of the future represented by soaring hi-tech share prices will be the most vulnerable. Not only do they not have all the earlier and substantial gains under their belts, they are also, for the most part, small-time individual investors with much more at stake. In the US many have invested "on margin", or in other words with borrowed money, and will now have to find the cash to cover their losses.
There is no doubt that the financial pain will hit economic growth. To the extent that consumers have been spending because rising share prices made them feel flush, they will cut back now. In America, the stock market had been creating a millionaire roughly every 15 minutes. Even though most had not realised all those gains, the gilded age spending they inspired will come to an end.
In addition, many companies will be forced to reduce their investment spending. Some hi-tech companies will now find it hard to raise funds for investment at all, after the cornucopia of recent months.
Slower growth is exactly what the authorities on both sides of the Atlantic want now. They have been spelling out, in increasingly plain language, the need for a slowdown. …