Boom and Bust Cycles

By D. Mark Singletary | THE JOURNAL RECORD, March 27, 2001 | Go to article overview

Boom and Bust Cycles


D. Mark Singletary, THE JOURNAL RECORD


I don't know how it works, but somewhere on Mt. Olympus, the money gods decide who shall be blessed and who shall suffer judgment. The rulings and dissemination alter lifestyles and bank balances, all the while pushing and pulling different groups between boom and bust.

Today's busted Internet entrepreneurs are really no different than oil field wildcatters, high-rise developers, home builders, defense contractors, commercial bankers or savings and loan operators.

All of these industries have experienced the blessings that flowed when it was their turn at the trough. All of these industries have also suffered incredibly when the crash came and millions of dollars were lost, thousands of workers lost their jobs and the future seemed bleak, not bright.

Will we ever learn?

We didn't invent this phenomena in the 20th century, either. Gold and silver prospectors, lumbermen and shipbuilders from the 1800s, along with alchemists from the middle ages endured the boom and bust cycles long before our time.

I propose that the same set of principles that initially rewarded investors willing to bankroll gold mines in the 1800s, then led to diminished returns, employment losses and widespread financial ruin still exists today.

It just seems to happen quicker and we all hear about it as it is happening.

Two years ago the future seemed bright and the business models coming from MBA programs across the country anticipated years and years of steady, if not staggering, growth for anything connected to e-commerce or the Internet.

Cash came rolling in. IPOs, angel funds, private placement venture capital, hedge funds, and technology-based mutual funds provided a seemingly endless supply of operating funds for anyone with a pocket protector and a laptop.

But, there were warning signs.

But, we choose generally to look past warning signs and come up with new phraseology to explain fundamental accounting and economic precepts that aren't followed or met.

Previous boom and bust cycles should have provided a more meaningful insight, if analyzed properly.

When times are good, builders and developers can borrow their lifestyle and collateralize their future. When a bigger, more expensive project is waiting for you, it seems easy to roll operating expenses and extravagances into short-term borrowing. That is, of course, until sales slow, interest rates rise or some uncontrollable force decides the party is over.

The Internet entrepreneurs and investors developed the phrase `burn through capital' to represent the amount of time and money that is consumed by business operations without any linkage to revenues from traditional sources. …

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