By NAT WEINSTEIN
On April 15, the day after Wall Street suffered one of its worst weeks since 1987, the editors of The New York Times felt the need to reassure investors that the sky was not falling.
Knowing that treating the sharp decline in stocks as insignificant would not be taken seriously, The Times editors laid the basis for boosting confidence and forestalling any tendencies toward panic by frankly acknowledging its ominous implications. But at the same time, they took pains to assure anxious stockholders that the economy was in no real trouble.
It was a slick piece of soothsaying that was designed to contribute to the Wall Street rebound that took place the following Monday. This is how this authoritative voice of American capitalism dealt with the previous week’s events. (The Times editorial was titled, “The Market’s Breathtaking Plunge.”):
Economists have warned for years that stock prices are unrealistically high, needing to fall by about a third, by one prominent estimate, to regain financial sense. But no amount of warning could take the fright out of yesterday’s record drops in all major stock averages. Investors lost about $1 trillion yesterday. Besides the horrific blow to personal wealth, there is the added threat to the health of the overall economy.
How important an event yesterday’s plunge proves to be depends on how much the market bounces back next week, and on other factors as well. Will people reduce their spending enough to trigger a recession? Will businesses, finding it harder to raise money on Wall Street, cut back investment plans, delivering a blow to long-term economic growth?
On these scores, there are firm reasons to remain optimistic. Stocks lost an astounding 23 percent on a single day, Oct. 19, 1987. Yesterday’s major averages dropped between 5 and 10 percent. Yet even the 1987 debacle caused relatively little hardship on Main Street. Under the shrewd leadership of Alan Greenspan, the Federal Reserve kept the economy growing. Mr. Greenspan is still in charge of the Fed, and he has the tools to make sure that Wall Street and Main Street do not rise and fall in lockstep….
Newsweek magazine played up the depression danger more forcefully than The Times. The edition of this magazine that arrived in my mailbox on April 18 raised the ominous specter of another 1929 resulting from this near meltdown of stocks.
But there was no danger that frank acknowledgement of this possibility might contribute to the danger of a worse sell-off when markets reopened on Monday, since the parallel between the mid-April stock slide and Black Friday week, 1929, was already widely perceived.
After all, over the last several years, an increasing number of respected capitalist economists had been entertaining the likelihood of a crash-many citing as evidence the unnerving similarity between events leading up to the Great Depression of the 1930s and the course of events in the 1990s.
The threat of another such crisis was, and is, in the air and is not likely to go away-even if it should happen that stocks resume their run up to new heights.
The front page of Newsweek featured in bold type the question: “Is the Bull Market Over?” And the feature article inside was titled, “The $2.1 Trillion Market Tumble.” (That’s how much was lost in paper wealth by stockholders that week.)
The first two pages of this Newsweek commentary featured a herd of bulls stampeding madly off a cliff. The article described the 25.3 percent drop in Nasdaq averages as “the worst one-week decline ever posted by a broad U.S. market index. Worse than legendary Black Friday week in 1929, worse than the week of the 1987 crash that sent the Dow industrials down 22.6 percent in a single day.”
The bottom of the next two pages laid out the ominous possibilities inherent in the sharp stockmarket decline with a series of cartoons illustrating what this magazine called a “Nightmare Scenario.” The cartoons boldly described the possible consequences “if the correction becomes a crash.”
The cartoons were strung across an ocean setting and spread along the bottom of the two pages. The first cartoon showed a bull splashing helplessly into the deep; the second and third showed office buildings shaped like dollar signs sinking, with bankrupted stock holders leaping from the rooftops; the fourth depicted a woman with babe in arms, stranded on the roof of a house symbolizing mass foreclosures as in the Great Depression; and the fifth showed an unemployed man on a raft holding a sign saying, “Need Work.”
Newsweek, like The Times, however, was also careful to emphasize the countervailing factor of an allegedly still-strong economy. But notwithstanding its call for optimism, the magazine’s treatment of the previous week’s events reflected what appears to be a genuine apprehension by a growing number of sober bourgeois economists that a major economic collapse, global in scope, could no longer be discounted, and that the longer a “correction” is postponed, the worse it will be.
Commentary by Wall Street pundits in the recent period, especially since the week ending April 14, has tended to hit on many of the same themes. Paul Krugman, for instance, a professional economist who now writes a column for The New York Times, wrote a piece in the paper’s April 15 edition on the irrational exuberance of large and small players in the world’s biggest gambling casino-called Wall Street.
He gives a short description of what many have characterized as the “herd mentality” displayed by large and small Wall street game-players:
“Investors buy because others are buying, sell because others are selling. When stock prices are rising, it’s called ‘momentum investing’; when they are falling, it’s called ‘panic.’ And panic, which has been building all week, broke out in full on Friday. … But will the turmoil in the stock markets spill over … into the real economy generally? Is this the end of the ‘Goldilocks economy’?”
(The reference to a favored bedtime story, Goldilocks and the Three Bears, served Krugman as a euphemism for the argument that the economy is really in fine shape because all the conditions for continued prosperity are “neither too hot nor too cold-but just right.”)
And like most others writing on the economy since April 14, he couldn’t help mentioning 1929-because like it or not, the current gyrations of stock prices evokes memories of that most infamous stockmarket crash. But unlike most other commentators, he argued that there is no comparison between 1929 and now.
He briefly notes that the stock slump 31 years ago, unlike now, was due to “institutional weakness and sheer policy stupidity.” But he claims that that is no longer the case. (By “institutional weakness” he presumably means that capitalism has learned from its mistakes and has redesigned its institutions for steering the economy through economic storms like the one that broke loose in 1929.)
But like The Times and Newsweek commentaries mentioned above, his main message is one of optimism. Thus, he ends his column with this uplifting advice to panicked investors: “Goldilocks is still alive and well. And anyone who has been selling [their stocks] on the belief that it is the end of the world ought to take a deep breath and calm down.”
Ironically, while he puts down those he treats as fools who stupidly follow the leader, he doesn’t, however, place any blame on the brokers, professional touts, and other “leaders” that have been getting rich giving herdlike “fools” the very same advice he ends his column with!
Enduring revival, or dead cat bounce?
By the time the Sunday, April 23, edition of The New York Times appeared, a week-long, but spotty, economic rebound had occurred. But it was not yet clear whether or not the latest correction would lead to another climb to new heights like the one following the 1987 one-day decline. And even if it does, it is already being increasingly punctuated by steep rises and falls in market averages. Such volatility is a symptom of an organism that is very sick.
In fact, a chart appearing on the first business page of the April 23 edition of The Times mirrored the pessimistic content of the lead article, titled, “Seeking Solid Ground Amid Falling Bodies.” The chart, comparing the fall and subsequent limited rebound of “new economy” stocks listed on the Nasdaq, was not a source of renewed confidence.
The chart appeared under a caption posing the $64 question-“Enduring Revival, or Dead Cat Bounce?” Posing the question this way accurately reflects the mood of generalized uneasiness on Wall Street, and even fear that the bull market is finished.
A companion article on the same page, titled, “The Making of a Market Bubble,” struck a similar note of apprehension. The subtitle summed up the state of disarray on Wall Street with the words: “The Internet Frenzy Ebbs, As Founders and Financiers Apportion the Blame.”
There can be no doubt that investor confidence in the economy has been damaged. But “confidence” is merely a psychological reaction to the largely hidden movement of market forces. Neither psychology nor the turbulence of the stock market are the cause of economic sickness or health.
It only appears that irrational mass investor optimism or pessimism concerning the health of the economy is responsible for wild swings in stock prices. Rather, it is the irrationality of an anarchic economic system that really defies human control that is responsible.
In any event, last month’s bad week on Wall Street sharply damaged the message promoted up until now by Bull Market tipsters and cheerleaders-that the so-called “New Economy” had opened up a new era of permanent expansion and unmatched prosperity.
The ‘New Economy’
In the first place, it must be said that the term, “New Economy,” is inaccurate and misleading. It implies that capitalism has evolved to the point that the fundamental laws governing the market-driven economic system have changed. What is indeed changing, however, is not new in the sense intended. Rather, it is entirely in accord with historic phases of more rapid economic expansion based on scientific and technological breakthroughs.
That is, the last several hundred years have witnessed the emergence of new industries such as those that flowed from the invention and practical development of the steam engine, telegraph, telephones, radio, electrification, and internal combustion engines.
The development of the gasoline, diesel and jet engines, moreover, made practical a variety of new, mass-produced commodities, such as automobiles, airplanes, helicopters and jumbo-jet aircraft.
Thus the latest breakthroughs in science and technology have led to the creation of another brand new industry based on control over the subtle and counter-intuitive forces in the microcosm-i.e., electronics.
It has produced a mind-boggling variety of new products-including computers, cell phones, and other electronic devices. Also deriving from electronics are robots and other computerized mechanical machines doing the repetitive but skilled functions formerly done by human beings on assembly lines. And spinning off from electronics are a range of products and services coming under the general heading of “information technology.”
Such innovations produce a qualitative expansion of the productive forces of society. But all things come to an end and so too did each of these upsurges in the productive forces. Moreover, history teaches that when they do, there is hell to pay; and the form of payment is in the currency of much human suffering.
‘Productivity: The Emperor’s New Clothes’
InvesTech Research is one of those publications issued by market analysts who make their living by selling advice to investors. We received the April 14, 2000, edition of this publication in our office while working on this piece. It was sent to us by one of our readers (to whom we are obliged).
This journal contains statistical information, coming from the horse’s mouth, as it were; and we refer to it because it serves to support some of the conclusions in this article.
Under the heading, “Productivity: The Emperor’s New Clothes,” the (unnamed) author of one of the reports in this prospectus starts his commentary with a quote from the April 4 Financial Times. He writes:
Mr. George [governor of the Bank of England] also warned that he saw no sign in Britain of the pick-up in productivity growth caused in the U.S. by new technologies. “The sad thing is, even though we fervently look for it, we don’t see in the data here the sort of improvement that they have seen,” he said.
The author later quotes Alan Greenspan on the matter of productivity:
“…there can be little doubt that not only has productivity growth picked up from its rather tepid pace during the preceding quarter century but that the growth rate has continued to rise, with scant evidence that it is about to crest.”
The author critically responds, arguing that productivity is the most “elusive of economic measurements.” He claims that government statisticians can no longer stand at the end of an assembly line and count the number of widgets coming off per hour.
Instead, he argues, the government agency that does the counting must somehow “measure overall economic output, divide that by some elusive gauge of labor input, and adjust the whole works for what they think is the impact of inflation. Productivity is the ultimate figure that drops out the bottom….”
He goes on to quote a researcher, a Professor Robert Gordon of Northwestern University, who in his published findings argues that the alleged surge in productivity has been centered in a single industry. Gordon concludes: “There has been no productivity growth acceleration in the 99 percent of the economy located outside the sector which manufactures computer hardware.”
The author then comments, “But the real stickler is how the Bureau of Economic Analysis calculates the price index for that industry.
He goes on to say that in the eyes of most real-world businesses, a computer “becomes obsolete in 3-5 years and must be upgraded.” He notes that generally, “the new one is intended to perform the same tasks as the older one albeit with some improvement in speed (and hopefully less crashing).” He points out, however, that no business views a speedier computer processor as twice as productive. He explains that “a 10 gigabyte hard disk isn’t a whole lot more useful than a five gigabyte hard disk.”
But he drives home his main point by noting that those who measure productivity don’t see it that way. For instance he pointedly notes that those officially responsible for calculating output tend to divide the total dollar output by the price index. And because the computer price index currently shows sharply declining prices, the dollar output only appears to soar along with the officially “determined” (“exaggerated” would be a better word) sharp rises in productivity.
The author concludes with this:
Dr. Kurt Richebacher, one of the “old world” thinking economists, was the first that we know of to bring this disparity to light. His assertion is that the government is measuring output in the computer industry as if Detroit was measuring output in cumulative horsepower. “Hey, we boosted average engine horsepower by 25 percent last year-that’s a 25 percent improvement in productivity!” Or it could be the same as measuring Detroit’s productivity by the average number of cupholders or seats per vehicle.
That may sound ridiculous, but it’s really happening. And the “productivity miracle” could vanish as mysteriously as it appeared-once growth in the high tech sector starts to slow….
If today’s “new economy” meets an untimely demise, this productivity boondoggle will be at the heart of the controversy and explanation. In the end, the Emperor’s new clothes may not turn out to be as shiny and protective as they appeared.
On April 29, further reports appeared in The New York Times further reflecting widespread bafflement among capitalism’s economic experts at the increasing unpredictability of global capitalism’s economic trajectory. George Soros, for instance, after seeing his huge network of highly speculative five “hedge funds” suffer a 20 percent loss-from $22 billion to $14.4 billion since the beginning of this year, frankly admitted that he had made costly misjudgments.
But this wily old empire builder, whose multi-billion dollar Quantum Fund alone has recorded an average profit of 32 percent a year between 1969 and 1999, revealed his insightfulness with a subtle metaphor expressing the unpredictability of the infinitely complex globalized capitalist economy. He reportedly told a news conference: “Maybe I don’t understand the market. Maybe the music has stopped but people are still dancing.”
Yes, people keep dancing and freight trains remain in motion, long after the music has stopped and engines run out of fuel.