High-Tech Quake May Shake More Than Silicon Valley

The consequent disruption to Silicon Valley's business ecology could be severe. The Valley is the largest high-tech cluster on the planet, the headquarters for giants like Apple, Google and Intel, and a hotbed of startups, with just under 30 percent of all U.S. venture capital dollars invested here.

The Silicon Valley is also the largest R&D center in the U.S., home to several major university research campuses, a national lab and countless corporate research enterprises engaged in everything from semiconductors to biotech, materials science and clean tech. The largest companies have extensive continuity plans that contemplate moving business operations to sites outside the Bay Area, but R&D operations and start-ups are not so portable.

The shaking will damage delicate equipment, trigger the loss of inadequately backed-up data and disrupt the personal lives of critical researchers and executives. It could be months or longer before business life returns to anything remotely resembling pre-quake conditions.

It is sobering to consider the consequences of a quake-induced high-tech disruption on the U.S. economy. The technology sector is deeply networked and highly interdependent. This is a plus when it comes to temporarily relocating business operations, but networks also spread unwelcome problems in unpredictable ways. Just as the recent mortgage crisis has spawned a crop of unintended consequences from the Bear Sterns collapse to retail chain store closings, the effects of a high-tech quake could reverberate around the world.

Such an outcome has an unsettling precedent in the 1906 San Francisco earthquake, which caused direct damages of $500 million in 1906 dollars, or just over 1.5 percent of the 1906 U.S. GDP.

This doesn't sound like much, but in a bit of brilliant economic sleuthing, Marc Weidenmier of Claremont McKenna College and his colleague Kerry Odell of Scripps College discovered that the financial reverberations bounced across the Atlantic to England and then back to the United States, precipitating the financial panic of 1907.

It turns out that at least half of the property insurance in San Francisco had been underwritten by British fire insurance companies, who were forced to liquidate assets in order to pay the 1906 claims. This caused stock values to drop precipitously and also threatened the gold-based British economy as gold flowed out to cover the U.S. payments.

The Bank of England responded by raising interest rates and tightening lending to the United States, which in turn pushed our country into a recession, leading to the Panic of 1907 and ultimately to a worldwide economic downturn.

Gold-based economies are a distant memory, but there are plenty of other ways quake-triggered financial shocks could propagate today. The Federal Reserve would never repeat the Bank of England credit-tightening blunder, but Weidenmier notes that the wild card is exchange rates. If the quake occurred in a moment like the present, when the dollar already was weak, then any attempt to stimulate recovery through additional liquidity could also cause further dollar depreciation. This in turn could shake global investor confidence in the dollar once and for all, triggering a long-feared shift from the dollar to the euro as the world's de facto reserve currency.

Such an outcome would change the U.S. financial landscape forever. Let us hope that the high-tech quake does not arrive anytime soon, but when it does let us also hope that Silicon Valley's legendary entrepreneurs will find a way to beat the odds and quickly overcome the adversity it throws their way.

Our economy, and that of the world, may depend on it.

Paul Saffo is a technology forecaster based in Silicon Valley. You can read more of his essays at www.saffo.com.

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