WIRED ON FRIDAY:It's unclear who will suffer most in the next few months, the US or the rest of the world, writes Danny O'Brien.

EVEN THE most optimistic figures are assuming that the US economy is lurching into recession. That spells a rough time ahead for Silicon Valley, a bellwether region in a bellwether state.

When other economies catch a cold from a downturn, California generally gets pneumonia - and then manically bounces back in truly bipolar fashion when the outlook gets sunnier. In the last downturn, the working population of Silicon Valley was decimated: freeways emptied, office blocks went dark, local tax revenues plummeted. So what will happen this time around?

In a sense, it's already happening. The fall in the stock market has affected everyone, successful or not: Google's stock has fallen by a third this year, Apple's by a fifth. Very few tech companies are going public, even those who had plans to do so.

Acquisitions are down and venture capitalists are putting out less money to new companies. Even the best company news is couched differently now: when Marc Andreessen, founder of Netscape, scored $60 million of new investment in his start-up Ning, he didn't crow about new expansion - he said it was to "make sure we have plenty of fire-power to survive the oncoming nuclear winter".

So how do you survive such inclement weather? Will the credit crunch and the US housing crisis finally spell the end for the Valley? Unlikely: if there's anything that this town has plenty of experience and memory for, it's surviving a economic blight.

It has its fallbacks and it has its bunkers. Nobody likes to admit it on the liberal west coast, but there's a degree to which all Valley economics are cushioned by the US's vast military expenditure.

This high-tech capital was built on government research and development grants and, when 2001 was devastating what was left of the dotcom companies, many were slyly switching from "b2b" to "homeland security".

It's not enough to hold up the billion-dollar companies, but it's oxygen for venture capital- sponsored start-ups. If it's not enough to run a business, it's certainly enough to keep the local academic institutions - the real life-blood of Valley culture - ticking over until the next boom.

Even if the money is bleached away from the commercial sector, Berkeley and Stanford remain to incubate the next wave of smart, cheap, young entrepreneurs.

But it's not so much what happens to Silicon Valley, or even America, as what it does to the rest of the global economy - especially the internet economy.

In the dotcom bust, it wasn't just US west coast net companies that were extinguished, but hundreds of similar companies across the world, from Dublin to Dhaka.

Such companies depend less and less on being in the right place to do their business, but they do depend on the right levels of hype coming out of San Francisco. If you're selling a web 2.0 internet application when the received opinion from Palo Alto punditry is that the market has gone, you'll find it hard to get the publicity, the customers, or the exit strategy you want.

Unless, of course, you just turn a profit by yourself. With the exception of the big stars such as Andreessen who still hunger for an IPO - that's what many of the newly hatched companies in the Valley and beyond are pushing for.

Rather than the risk-all policy of a business plan that demands explosive growth, many net companies are now happy to make the slow expansion based on actual revenue that characterises almost every other small to medium business practice.

They are, if anything, more capable of such gentle scaling than traditional companies. The tools that have emerged in the last five years have lowered the entry costs for all companies that wrap their business around the internet.

While that has increased competition, it has also meant that the possibility of prospering outside of the Valley's venture capital-driven marketplace has increased. Other innovations in scaling web hardware and software mean that the ride from a hundred customers and one employee to a million and 30 is far less bottle-necked by IT infrastructure.

Slow growth isn't what Silicon Valley venture capitalists expect, but it does mean that not everybody needs millions of dollars to survive in the nuclear economic winters. Silicon Valley's core competency - high-risk innovation - may continue on its crazy peak and troughs cycle, but that doesn't mean that the market it has created needs to.

The majority of the internet economy is now far more tied to the physical world than the short- term vagaries of the investment markets.

The recession may descend, but I think that Silicon Valley will not do so badly as it did back in 2000. The question is: will it do so well as its many spin-offs across the rest of the world?

It's unclear who will suffer most in the next few months, the US or the rest of the world, and that question is played out in miniature within the tech world.

The Valley is accustomed to the character-building qualities of an icy plunge into local economic devastation. When it emerges from that distraction, though, will it find more gently moving economies have slowly overtaken it?