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HomeAll Ch00 Ch00 NewsWithout Easy Money, the Tech Sector Faces Hard Times

Without Easy Money, the Tech Sector Faces Hard Times

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he tech sector in the US has benefitted from more than a decade of ultra-low interest rates and easy money. But now it looks like the easy-money era may be ending—at least for now—and that means problems for the sector so long wedded to cheap loans.

Just a year ago, the ten-year treasury’s yield was 1.4 percent. This month, however, the 10-year’s yield is up to over 3.6 percent, and throughout the economy, debtors are finding that debt service isn’t nearly as cheap as it used to be.  Employers in the tech sector are responding as one might expect. Meta/Facebook has announced 11,000 layoffs. Amazon will soon lay off 10,000 employees. Twitter has laid off at least 3,700 employees. Stripe, Microsoft, and Snap have each laid off about a thousand workers. Salesforce and Zillow have laid off hundreds. Dozens of other firms have slowed or frozen hiring.

Thanks to rising debt costs, employers need to cut costs, but many employers will soon be facing declining revenues as well. Given that a multitude of indicators point toward an approaching recession—the yield curve is now the most inverted it’s been since 1982—this is likely just the beginning.

What we’re witnessing is the end of the latest tech bubble, and what seemed like rock-solid companies set to expand effortlessly forever will suddenly be characterized more by cost-cutting, falling revenues, and a hard slog in search of more capital. 

The end of easy money will also separate the real innovators and entrepreneurs—people who build real value—from the big-talking frauds who only look smart or productive when they can just borrow more cheap money to kick the can of their failing and stagnating ventures down the road. 

Unless the central bank and governments intervene to provide bailouts and backstops, the industry will face a much-needed reckoning. This will help clear out more than a decade of malinvestments and bubbles propping up top heavy and inefficient companies that could never survive without the artificially cheap credit provided by asset purchases and ultra-low-interest rate policy at the central bank. 

 

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