This year, Facebook purchased the mobile-messaging application WhatsApp for $19 billion, or about $350 million per employee and $40 per user, only some of whom even pay the $1 annual fee for the advertisement-free platform. But what was perhaps most remarkable about Facebook’s acquisition of WhatsApp was that the start-up was making any money in the first place. In recent years, Facebook has shelled out 10-figure sums for Instagram and the virtual-reality headset maker Oculus V.R., both of which had scant or no revenue. Ditto for the safe-sexting-enabler Snapchat, which reportedly turned down a $3 billion offer from Mark Zuckerberg.  Those numbers seem as bubbly as a hot bath or cold Champagne, a sure sign that Silicon Valley valuations have soared far higher than Silicon Valley balance sheets can support. A recent downturn in tech stock prices is perhaps indicative of this uncertainty. But if tech really is a bubble, would the rest of the country be harmed if it burst?  There are hundreds more examples of big companies spending eye-watering sums for acquisitions, firms going public at fat valuations, tech stocks reaching high highs and venture-capital firms tossing money at start-ups. That’s not to mention the cultural afterbirth of all that cash, from the medieval-themed weddings to the office ball pits. (If HBO sees fit to satirize your corner of the economy, things have probably gone a bit weird.) Meanwhile, the rest of the country slouches along, unemployment high, wages stagnant, credit tight. But Silicon Valley feels like a foam party.  1. Silicon Valley’s boom might be a byproduct of Fed policy.  2. Because the economy is bad everywhere else.  3. Which means protection from contagion.  4. A textbook Pyrrhic victory.  It turns out that one might have more to do with the other than you would think. The Federal Reserve is currently keeping interest rates very, very low. They’ve been keeping them very, very low for a long, long time. The idea is to spur investors to spend now — but the economy is so crummy that few know quite how to do that. A report from Standard & Poor’s released this month found that 1,700 big, nonfinancial companies were holding on to about $1.53 trillion in cash and short-term securities at the end of 2013. That is enough liquidity to purchase Google, Apple, General Electric, McDonald’s, General Motors and Walmart outright, with a few billion to spare.  Pension funds, endowments, high-net-worth individuals and the like are also trying to figure out how to invest all their money — and along with places like the Bakken and a few emerging markets, Palo Alto seems awfully appealing. A few million in seed funding might turn to billions in an acquisition in just a few years, after all. “Valuations are at extreme levels because you cannot get a decent return on your money doing anything else,” Fred Wilson of Union Square Ventures wrote on his blog. “It’s been a good time to be in the V.C. and start-up business, and I think it will continue to be as long as the global economy is weak and rates are low.” In other words, the perks-laden, savior-and-ninja-saturated, TED-talking beast that has seemingly taken over Northern California in recent years might be a byproduct of high corporate profits and Fed policy as much as anything else.  But what happens if and when the normal patterns of the economy reassert themselves? What happens when the easy money gets a bit harder to come by, and firms suddenly need the companies they invest in to turn a profit? I put that question to half a dozen academics and businesspeople, and the general response was a shrug.  If it is a bubble, one thing that sets it apart is its relative dearth of retail investors. The dot-com bubble of the late 1990s and the economic collapse of 2008 still loom large, for investors and executives alike. “In the 1990s, as time went on, skeptics started to see Porsches in their neighbors’ driveways,” said Lise Buyer of the Class V Group, a consultancy for firms looking to go public. “Time beat back the skepticism.” It resulted in a disaster on the Nasdaq and the end of the Clinton boom. But now, she said, there is fresh memory of how badly things can go, and how quickly. For evidence, she pointed to the fact that 10 of the 19 technology companies that went public this year are trading below their offering price. “That isn’t the kind of performance that drives most folks to bet the mortgage money on the next hot wonder company,” she said. “Sanity prevails.”  What about those start-ups raising mountains of cash from investors? The queasy truth is that many of those investors could afford to lose it all. Technology giants — Apple, Facebook and Google, among many others — are raking in cash. They might be overpaying for acquisitions, but there is no reason to think that should damn their bottom lines in the long term. The same goes for the rich individuals funneling money to young companies through venture-capital firms and other vehicles.  “Where’s the bulk of the ownership of these companies?” said Josh Lerner, a professor at Harvard Business School. “They’re mostly in the hands of a small number of venture funds.”  But the American public has bought into the tech boom, at least a bit, in a more concealed way. Big institutional investors, like pension funds, do put some of their money into private-equity and venture-capital firms. A drop in tech stocks or a flotilla of start-ups going belly up could sting Uncle Joe and Aunt Nancy that way.  And that downturn might already be taking hold. Recently, Bloomberg asked investors, analysts and traders if Internet and social-media stock valuations were unsustainable. Only 14 percent did not see a bubble. Even some tech companies themselves have argued that expectations have drifted too high. For instance, Netflix’s chief executive, Reed Hastings, recently said he sensed some “euphoria” driving the firm’s stock price. “We have a sense of momentum, investors driving the stock price more than we might normally,” Hastings said. “There’s not a lot we can do about it.”  But relatively few tech companies have actually gone public during this boom, which wasn’t the case in the late ’90s: With so much corporate cash sloshing around, there is less need to head to the public markets in order to raise capital. And investors seem to be more wary. This spring, many market participants ditched high-growth but volatile biotech, social-networking and cloud companies stocks, noted Kathleen Smith of Renaissance Capital, an I.P.O. investment-advisory firm. “This was a necessary correction that many had been looking for after such a strong sustained rally,” she said. It’s a sign of investor discipline. And although the sell-off has sent prices sliding, the damage has been contained. Far fewer Americans are mortgaging their homes to day trade, as they were back in the days of Pets.com.  Perhaps the most immediate effect of a tech bust — and one I imagine would be accompanied by a certain amount of delicious schadenfreude outside Silicon Valley — would be on the local economy. Suddenly broke, start-up guys would stop buying plug-in cars and condos and expensive green juices. Housing values might tumble; fancy boutiques and car dealerships might close; yachts and vacation homes in Hawaii might go into foreclosure. But the effect would probably be fairly localized to areas of Northern California, New York, Boston and the like.  The truth is that most Americans have little interaction with the big-money, small-jobs technology boom, so they might be sheltered from the worst of the technology bust, at least as it looks today, if not years from now. But that might be cold comfort: It is a sad state of affairs if one of the most vibrant, explosive and creative parts of the economy — and one of the few that is minting millionaires — seems more like a walled garden than a public park.  Annie Lowrey is an economics reporter for The Times.  A version of this article appears in print on April 27, 2014, on page MM14 of the Sunday Magazine with the headline: If a Bubble Bursts in Palo Alto, Does It Make a Sound?. Order Reprints|Today's Paper|Subscribe
Silicon Valley’s isolation from the rest of the economy guarantees it can’t hurt us (or help us) much.