Washington & Wall Street: Living in the Twitter Economy

The initial public offering for Twitter (TWTR) came out Thursday.  The stock priced at $26 and subsequently rose as high as $50, then fell back down to a little less than $45.  Not bad for a company that has virtually no revenue and no profits. Today, at least, Twitter is worth $24 billion. 

Twitter’s initial public offering may have signaled the return of risk tolerance that should prompt professional investors to pause, Oaktree Capital Group LLC (OAK) Chairman Howard Marks said.  But more to the point, Americans should look at the Twitter IPO as confirmation that the Federal Reserve Board has once again engineered a new financial bubble on Wall Street that is almost certainly going to end badly.

While the real economy in the US continues to founder, the speculative economy that includes the likes of Twitter, Facebook and other virtual enterprises is racing ahead.  The logic behind companies like Twitter has nothing to do with production or profits, but instead the idea that this newly minted public company can somehow, some way figure out how to monetize the millions of eyeballs that use this free communications medium each day.   

But the sad fact of the matter is this: Were Twitter not free to the millions of users, would anyone care?  Or more to the point, if the Federal Open Market Committee were not keeping interest rates near zero, would anyone buy shares in Twitter, Facebook or any of the other marginally profitable “social media” scams?  The answer to that question dear friends is no.

Mark Synder, writing in the blog appropriately entitled “The Economic Collapse,” asks the obvious question:

“Shouldn’t Internet companies actually ‘make a profit’ at some point before being considered worth billions of dollars?  A lot of investors laugh when they look back at the foolishness of the ‘Dotcom bubble’ of the late 1990s, but the tech bubble that is inflating right in front of our eyes today is actually far worse.”

Since most of the real companies left in the US economy are actually buying back stock from investors, and since the Fed is penalizing savers via low or no real interest rates, Americans are being forced to put their savings into pretend companies like Twitter and Facebook.  Real companies that have access to the bond markets can borrow for almost nothing and buy back their shares, forcing the poor souls who actually save and do the right thing to “invest” their fiat paper dollars in ridiculous deceptions like Twitter.  

So does the fact that Twitter’s share almost doubled in price on the first day of trading mean that the shareholders are wealthier?  The answer sadly is no.  You see, the real, productive economy only grows at the same pace as the population, roughly 2% per year in real, inflation adjusted terms.  I wrote a comment on Zero Hedge, Debt Deflation and the Illusion of Wealth, earlier this week where I quoted my friend Alex Pollock of American Enterprise Institute on the “illusion of wealth.”  He notes:

“Before 2007, central bankers convinced themselves they had created a new era, ‘The Great Moderation,’ but what they actually presided over was the Era of Great Bubbles.  In the U.S. we had first the Great Overpaying for Tech Stocks in the 1990s, then the Great Leveraging of Real Estate in the 2000s.  Inevitably following each of the great bubbles was a price shrivel.  Then many commentators talked about how people ‘lost their wealth,’ with statements like ‘in the housing crisis households lost $7 trillion in wealth.’  But since the $7 trillion was never really there in the first place, it wasn’t really lost.”

For the past several decades, successive US governments and Federal Reserve Boards have used the growth in the speculative economy to distract Americans from the lack of growth in the real economy – the economy measured in jobs and real consumer purchasing power.  Our political leaders pretend that an economy can grow fast enough to meet the expectations of our thoroughly spoiled population, fueled in part with tens of billions of dollars borrowed from future generations.  But the cost of this mirage, this illusion of wealth, is a steady undercurrent of inflation that robs working families of the ability to meet their basic needs. 

In the first nine months of 2013, Twitter reported revenue of $422 million and an operating loss of $126 million.  As with the US economy, the management of Twitter wants us to believe that if we borrow enough and spend enough, prosperity and profits will result.  But the sad fact is the even with millions upon millions of users, Internet companies such as Twitter and Facebook cannot prosper if these very same users grow poorer by the day because of the reckless policies of the Federal Open Market Committee and Washington. As I wrote in Zero Hedge:

“Of course the neo-Keynesian socialists who dominate the economics profession like us all to believe that the ‘wealth effect’ of rising home or stock prices is real, but in fact, like most economic notions, it is merely an illusion foisted upon all of us by a servile financial media. Income and production, not asset prices, are the real bases of wealth.”  

Hopefully this is food for thought for the readers of Breitbart.com