Facebook, the markets, and the American economy

Posted Wednesday, May 23, 2012 in Analysis

Facebook, the markets, and the American economy

by Gina Hamilton

Facebook issued its initial IPO last week, and to the surprise of many analysts (but not all) the market price, as of Tuesday, fell by 18 percent of its original price of $38 per share.  By now, those analysts had expected Facebook stock to soar.

So what happened?

Facebook happened to plan its debut during a particularly rough week.  The European crisis was still hovering in the news; JP Morgan Chase had just taken a rather public and embarrassing bath, and in general, the casual investor was pulling out of stocks and retreating to bonds, which were frankly earning more and were safer investments.

Facebook also oversold its offering, selling 421 million shares, nearly one and one fourth share for every American alive.  Someone forgot economics 101 when determining how many shares to sell -- with too many dollars chasing too few goods, price rises, but when too many goods are seeking not enough dollars, price falls.

Prices fell.

The bigger, long term issue for Facebook, as well as other internet companies, is really a matter of how the money is made, however.

Facebook's revenue stream model is incomplete at best.  In the week before the IPO, one of its largest advertisers, General Motors, pulled back on some Facebook advertising because it didn't feel it was getting a good return on its money.  Unlike Google, which has branched out into email and business internet systems, some of which are paid items, the only way Facebook makes money is through advertising dollars, so GM's announcement, practically on the eve of Facebook's IPO, was particularly bitter news. 

Facebook doesn't have the reach of Google, either.  Google is a search engine, and virtually all other companies play ball for free.  They have to, because Google is increasingly, if not the only game in town, the only game that really matters.

Facebook will have to go back to the drawing board for a viable business model if it wishes to watch its stock prices rise.  In the meantime, investors are justifiably wary of stepping into deep internet waters.

But is there a deeper message for the American economy? If there is, it is this: Investors, whether they are treasury bond buyers or Facebook dabblers, expect something real behind the curtain.  Currently, the American economy is smoke and mirrors, nothing more than people making money when money changes hands from one bank to another to another.  That's not real money, it's illusory.  The system cannot long stay afloat while one bank borrows money from another.

When the house of cards falls, there is nothing to use to help pick up the pieces.  That is why the economy is not rebounding as it has after previous recessions.  It's not that the current recession is deeper ... although it is ... it is that there is no real productivity in the system.  Productivity is the rate at which real goods and authentic services are produced -- the number of manhours it takes to build a refrigerator, the number of days it takes to train a young horse, the expenses in labor and materials it takes to build a house, teach a child, clean a bathroom floor.

There is no true productivity involved when only money changes hands, and precious little involved when people update their status or respond to a post.  Nothing in the Facebook model or in the financial services model helps to repair an economy gone bad.  And that's why Facebook stock prices are sinking.

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