EDUCATIONAL USE ONLY: Copyright Guardian Media Group plc

('The Guardian', 13 March)

Tomorrow the internet goldrush will reach a new pitch of excitement with the flotation of Lastminute.com. But amid the euphoria and free spending, there are alarming echoes of past bubbles. Larry Elliot asks if this one is about to burst:

It's bonanza time.Lastminute. com is coming to the stock market tomorrow (ie 14 March)and the world is going share crazy. Everybody, it seems, wants a piece of a company that at the 11th hour can get you a flight to Spain or two tickets for the theatre. So much so that by tomorrow night Lastminute.com will be worth - on paper at least - as much as Manchester United, the world's richest football club. The dizzying price tag attached to a company that has been in business for all of 19 months seems a perfect symbol for the giddy mood of affluence that has gripped much of Britain since the words dot com became synonymous with easy money. With a pressure cooker stockmarket fuelling a frenzy of spending, the signs of an 80s-style boom are all around: soaring house prices, roaring sales of the most preposterous luxury goods, and the surest indicator of all, figures for the consumption of champagne that suggest some people are confusing it with sparkling water.

But as punters sit and dream of the untold riches that Lastminute.com will bring them, they would do well to ponder four little words - the four most dangerous words in finance. This time it's different. Of course, speculators caught up in the frenzy are not doing any pondering at all. They're sticking to the dreaming. We've had stock market bubbles before, so their argument goes, but they were based on uncontrollable greed and hysteria. This time it's different. We've had stock market bubbles before, but back then there was no Alan Greenspan, the head of America's central bank, to steer us to safety. This time it's different. We've had stock market bubbles before, but that was when companies were run by charlatans and deadbeats rather than dynamic, young entrepreneurs. This time it's different.

But what if it isn't? What if this bubble - this wild speculation in companies unheard of six months ago - is about to go the way of all the others, from tulip mania in 17th-century Holland to the Japanese stock market in the late 80s - and end in a spectacular crash?

If - or rather when - it happens, it will happen suddenly. And the impact will be savage. Two weeks before the crash of 1929, the New York Times carried a headline: "Stocks will stay at high level for years to come." A week later, when the first signs of a problem were emerging, the eminent Yale economist Irving Fisher, had some soothing words. "Fisher says prices of stocks are low," declared the stately New York daily. In subheadings it added: "Quotations have not caught up with real values as yet, he declares. Sees no cause for slump."

A week later came Black Tuesday, when the floor of the New York Stock Exchange descended into pandemonium and dealers tried to offload shares at any price. Stocks that had been previously been the most fashionable - such as Radio Corporation of America - were among the biggest losers. The pages of the Times took on a more sombre tone.

Slowly, perhaps too slowly, today's policy makers are starting to wake up to the idea that it could all happen again, that the laws of economics have not been rewritten by Bill Gates et al, and that unless investors tread warily, Lastminute.com could turn into Lastgasp.com. The chancellor, Gordon Brown, last week urged investors to exercise caution, suggesting "people will want to look at the performance of each of these individual (high-tech) companies."

Howard Davies, head of the Financial Services Authority, the City's watchdog, was even more blunt, saying: "When a company is valued more on hope than on expectation, then you can expect it to be a volatile stock. We know from previous experience that many of the companies around at the moment will not be around in three to five years."

A similar attempt to let the air gently out of the stock market bubble is underway on the other side of the Atlantic, where Greenspan has been nudging up interest rates to slow down America's booming economy. He believes that there has been a renaissance in the US economy, and he's right, but not one that justifies the extraordinary rise in high-tech stocks on Wall Street. A year ago, the Nasdaq index of new technology companies stood at around 2,000; it hit 3,000 in November, 4,000 in December and 5,000 last week. Tim Congdon, one of the City's leading economists calls the valuations on the Nasdaq index "insane". Greenspan now has the unenviable task on his hand: how to deflate the bubble without bursting it.

Will he be successful? In all honesty, nobody knows. In financial markets everybody is blessed with 20:20 hindsight, but anyone who says they can say precisely when there will be a crash is lying. It could be this year, next year, sometime, never. What can be stated with some justification is that the warnings are justified by historical precedent and that the longer the high-tech frenzy goes on, the shorter the odds on an eventual day of reckoning.

Some of the valuations of the high-tech companies look - how shall we put it - somewhat optimistic. Lastminute.com, for example, is expected to have a notional value of #1bn when its shares go on sale today. Its revenues in the last quarter, which included the peak Christmas buying season, totalled #409,000. So far, what the company has going for it is a bright idea and a good brand, but not that many customers. It is losing money, lots of money.

Those who argue - as did Irving Fisher in 1929 - that the market is not over-valued would say that there is nothing wrong with that. Plenty of companies lose money when they are getting the business established, when building up a customer base takes precedence over profitability. Capital investment is expensive and so is advertising.

In the end, however, companies that succeed in a market economy are those that make profits. That may sound brutal, but it's a fact of life. A company's share price reflects the profits that investors expect it to make in the future, and eventually they will want to see some signs that those profits are going to be delivered. And here's the rub: not only have the vast majority of the dot.com companies never made a profit, but they are unlikely ever to do so. Why? Because there are too many companies chasing business at a time when profit margins are being squeezed by intense competition.

The online market for books is a case in point. Amazon is the market leader in this field, although it, too, has never made a profit. Yet anybody keen to buy a book over the net can log on to a website called Bookbrain.co.uk, which will search all the online booksellers and give a rundown of price, delivery times and the cost of packaging and postage. Take Delia's second How to Cook book, for example. This is available for #16.99 from the BBC but much more cheaply online. According to Bookbrain, Amazon has it at #10.94 including p&p, but two other outlets - Alphabetstreet and Country Bookstore are churning it out at #8.49. All this is wonderful news for the consumer, but doesn't do much for the bottom line of Amazon, or any of the other online bookstores.

The cannier investors are starting to latch on to this inescapable truth. Last month's stock market darling, Freeserve, saw a third wiped off its share price last week when it became clear that a price war among internet service providers was bound to cut revenues and profits.

While all eyes have been on the go-go stocks in the high-tech sector, shares in so-called old economy companies have been in the doldrums. Brewers, banks, supermarkets, retailers, power companies have been churning out healthy profits, but no one has been even remotely interested in fuddy-duddy companies run by men in suits. For those who believe in happy endings, the hope is that when the bubble bursts for the high-tech sector, the money will simply rotate into the old economy stocks again and the technological revolution - which is for real - will embed itself into the economy without any of the accompanying hype. If that happens, there will be a short period of turbulence, but nothing worse.

But there are pessimists who argue that this ignores the factor that has characterised all post-bubble periods - panic. When sentiment turns, it can turn so quickly that policy makers cannot respond quickly enough and by the time remedial measures kick in it is too late. One favourite scenario for the Cassandras is that the determination of America to live beyond its means forces Greenspan to continue ratcheting up interest rates. At some point, companies start reporting that their profits are being affected, leading to a crash in share prices. Foreign investors - up to their necks in Wall Street - suffer big losses, leading to knock-on effects on stock markets around the world. The fall in the stock market then undermines the hitherto strong dollar, affecting exports from Europe and Asia by making them more expensive. In these circumstances, there would be a very nasty global recession, with the strong possibility of falling house prices and the certainty of sharply rising unemployment.

The worst-case scenario, of course, would be a full-scale 30s-style slump. This is possible, but still highly improbable unless politicians and central bankers repeat the serious mistakes made in the aftermath of the 1929 crash, when they failed to cut interest rates quickly enough and raised taxes to keep budgets in balance.

Graham Turner, economist at GFC economics, said: "This is not going to be pleasant. But only if prices come down so quickly that they turn negative and we get a period of deflation will policy makers be in serious trouble. Otherwise, we should come out the other side." He added that the likeliest outcome was that the men in suits at the old economy companies would have the last laugh. "A lot of internet companies will be swallowed up by traditional firms, who will be able to cherry pick the best brand names at the bottom of the market. Let's be honest: there are some good brands out there but they won't be able to keep going when there is a big correction."

For the rest, the future looks less bright. One of the internet's most entertaining sites is iTulip.com, which brilliantly lampoons the whole high-tech bubble. "Now you, too, can enjoy the thrill of owning an uneconomical internet company's stock certificate without fear of losing all your money," it says. "Buy an iTulip.com Stock Certificate. Not only does iTulip.com not have any assets, revenues or profits, it doesn't even exist. Of course, some internet companies won't exist either after the internet stock speculative mania ends."

At the moment, iTulip.com is plain funny. Before long, it could seem less amusing.

Bubble trouble: the tell-tale signs -

* It's spend spend spend, as the lucky winners offload their gains. Champagne and cocaine fuelled the City in the 80s; today the traders blow their bonuses at lap dancing bars. One Oxfordshire estate agent has a waiting list of more than 80 for houses in the #2m-plus bracket. For the super rich, a new age of conspicuous consumption offers retail therapy the rest of us can only dream of. The timepiece of choice for those with real money is the Patek Phillippe Calibre 89 - yours for a mere #1.7m.

* Commentators claim that the business cycle has been abolished. In the past when analysts have declared that the fundamental rule of economics - all good things come to an end - no longer applies, it's usually been swiftly followed by the inevitable crash.

* The business pages are the most popular section of the newspaper. The Sun and the Mirror tipping shares is the equivalent of Joseph Kennedy's shoeshine boy giving him investment advice - a sign it's time to get out of the market.

*There is a lemming-like rush to invest in whatever is inflating the bubble. Thousands of first-time homeowners climbed on board the UK property bandwagon in the late 80s because they were told prices would always go up, only to see the value of their investment crash within a few years.

-- Risteard Mac Thomais (uachtaran@ireland.com), March 14, 2000

Answers

One reason this crash will be worse than the 30's is that we now have two indicies that will cycle: DOW and the NASDAQ.

According to conventional economic theory, DOW should have cycled around 1990. Instead, a new market was created that was fueled by new speculation in the tech sector. This allowed the DOW to continue to inflate while another "cycle within a cycle" expanded.

When it finally crashes, the world will be in uncharted economic waters.

-- Things that go boom (@ .), March 14, 2000.

For those with countercyclical businesses, your time is coming:)!

-- IN (IN@dot.com), March 14, 2000.