The great high-tech bubble in world stock markets is bursting in a big way. Since the beginning of this millennium year, the US index of the value of high-tech companies, the NASDAQ, has fallen 33%. But this is just the start. That's because the NASDAQ is still 40% higher than it was this time last year. That shows how fast and how high it has risen over the last few years as investors piled in to buy internet start-up companies in a lemming-like rush to get rich quick. Over the last two years, $100bn has been invested into start-up companies in the US alone.

And some did get rich, as we know, at least on paper. The owners of these small companies (like the well-publicised Lastminute.com) suddenly had millions to spend as the value of their companies on the stock market went through the stratosphere. And the somewhat larger companies that converted themselves into high-tech operations by clever PR and hype also became huge. Earlier this year in the UK stock market an established company, Whitbread, which employs thousands of people in its breweries, pubs, hotels and catering operations, was removed from the list of the top 100 companies (measured by stock market value) by such household names as THUS (???) and Baltimore Technology (???) and Kingston Communications (???).

The last name is none other than the old Hull Telephone company, which was the only telephone system not run by BT in the UK but owned by the ratepayers of Hull. Just a few years ago it was privatised and converted itself into an internet provider. Overnight it has become one of the biggest companies in the UK. But of course I mean big in terms of how it is valued by investors, not in terms of its contribution to the real economy in production, employment or even in profit.

The absurdity of the valuations of these 'new economy' companies can be measured by comparing a small Indian company called Satyam Infoway. It employs 500 people in Madras, India. It provides an internet service to just 120,000 customers in India and makes $16m in revenue a year (and a small profit). The company is worth $7.3bn. But take Grosvenor Estate, the property company owned by the Duke of Westminster. Grosvenor owns 100 acres of prime sites in Mayfair and another 200 acres in Belgravia - the poshest bits of London property. It also has extensive land and buildings in North America and the Far East. It's worth less than Satyam - $5.9bn on the stock market. But which is really the more valuable and secure company?

Well the bubble has burst. The stock market values of the likes of Kingston, THUS and Baltimore are plummeting. They will be removed from the top 100 stock index almost as soon as they have joined it. And now smaller start-up companies are going under. Boo.com is the first biggish one to lose its investors over £80m when it collapsed. And a recent survey suggested that 80% of existing internet start-ups in the UK would go bankrupt before this millennium year is out.

Why? It's simple. Far too much money has been ploughed in compared to potential profit. Indeed, most of these companies won't ever make a profit for their investors. As the Polish Marxist economist of the 1960s, Oscar Lange, once pointed out (echoing Karl Marx): "the system of 'free competition' is a rather peculiar one. Its mechanism is one of fooling entrepreneurs. It requires the pursuit of the maximum profit in order to function, but it destroys profits when they are pursued by a larger and larger number of people".

As we have argued before in this column, this internet bubble is nothing new. Between 1900 and 1908, 485 companies entered the great automobile business in the US. By the end of 1908, 262 of them had shut down.

The question on the lips of the followers of capitalism's roller coaster ride, is whether the bursting of the high-tech bubble will be followed by a general fall in stock prices and then a world recession or slump in the real economy. The jury may still be out, but the majority of jurors still seem convinced that there will not be a hard fall, but just a nice soft landing for world capitalism. The scenario is that the stock market will sell off some more and then settle down and start rising slowly later this year. The increases in interest rates being imposed by the US Federal Reserve Bank and others around the world will do the trick of slowing down the US economy from a breakneck pace of 5% a year to say 2.5-3.0%, but no more. That will ensure that the rest of the world grows reasonably as well.

But will it be so easy to engineer a slower rate of growth with such precision? After all, this is capitalism we are dealing with! So far, the Federal Reserve has increased interest rates to 6.5%, with inflation at around 3%. So the real rate of interest is 3.5%. And yet there is little sign that American households have stopped their spending spree. And, most importantly, American businesses have not stopped borrowing huge amounts of money to invest in buying other companies or in keeping up the value of their stock prices, or investing in high-tech equipment. American companies have never borrowed so much in relation to their cash flow in the history of capitalism! Between November 1999 and February 2000, 'margin debt' as it is called increased by $83bn, or over 130%! The Federal Reserve is going to have to raise interest rates even more to stem this borrowing binge.

But in so doing, it is going to squeeze US industry to death. It is bound to overdo it. Suddenly investors will stop borrowing because it is getting too expensive to do so. Then they won't go on propping up these internet operations that make no money. They will go under, and with them, will go the confidence of other American businesses and households that the boom can continue. Then the great house of cards will tumble. Far from the US heading for inflation, as the financial experts worry, the opposite will be the case. Deflation is the real banner of this epoch. Prices are at 40-year average lows around the G7 world. Higher interest rates coupled with narrowing profits will crush the G7 economies. Profitless prosperity will turn into deflating depression.