Behold: The Works of a Generation Begin

Irrational Exuberance has returned to the internet world. Investors should beware.

So frets the Economist in a leader and briefing.

The argument is more or less is summed up in this graph (plus a truckload of breathless anecdote):

Right.

Well, I think this venerable rag has missed what’s going on. Recall the effect of demographics on an economy: piles of young people spur innovation.

Now look at this graph (probably have to click through, sorry):

Group 1 is the baby boomers. Group 2 is the baby bust. Group 3 is the echo.

I’d argue that this ‘tech bubble’ is the beginning of the baby boom echo making its mark. If this is so, it will have the capacity to absorb a lot of investment.

There are two important advantages that the echo has over its boomer parents: the unregulated platform of the internet (government is hands-off) and the supremely scalable infrastructure of the cloud (scale up and scale down).

Bootstrapping is extremely effective, perhaps at a historical peak.

Angels are one of the things the public stock markets ‘bought’ with the previous bubble. We’re seeing the fruits of that bubble now, with a bit of a longer gestation period and intermediated through Valley insiders.

Now, I’m not a gigantic fan of the social media frenzy. Best case scenario is that facebook, twitter, linkedin and gruopon (etc ad nauseam), collectively, replace the MSM. Not a big part of the economy.

For my theory to hold true, we’re going to need some more benefits. My instinct here is to say that the technology side of the coming wave of innovation happens first because it is so flexible and has a pool of capital waiting for it. Innovation in more rigid areas will take some time.

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