By Michael Kinsley
Friday, July 26, 2002; Page A33
As of Wednesday morning, the New York Stock Exchange Composite Index was
below where it had been five years ago. So were the Dow Jones Industrial Average
and what used to be called the "technology-rich" Nasdaq. The markets had a good
day Wednesday. Nevertheless, your money would have done better for the past five
years if you had hidden it behind the dresser. Of course, investors didn't feel poor five years ago. In July 1997 those
three indexes were up by almost half in the previous 12 months. They were far
higher than in December 1996, when Alan Greenspan gave his famous warning
against "irrational exuberance." Pundits (including this one) were saying stock
prices had reached heights that were unsustainable, and then felt foolish as
they continued to soar. Somehow, though, the same place doesn't seem as exuberating on the way down
as on the way up. It's like passing through the same airport on your way home
from a vacation. And the fact that we were popping champagne and feeling great
when we were here the last time is unconsoling for another reason, too: It's a
vivid reminder that we still may have a long way to go in retracing our
steps. There must surely be a statute of limitations on bragging rights about
economic predictions, especially predictions about the stock market. I claim no
prize for predicting five years ago the imminence of something that finally
happened the past few weeks. Like a stopped clock, almost any prediction about
the economy will be correct eventually. Predictions of prosperity or catastrophe
derive more from psychological disposition than from dispassionate analysis. Nevertheless, my rationalization for pessimism five years ago still seems
sound. In 1997 the major indexes were up by 40 percent or more during the
previous 12 months -- the Dow had even broken 8000! -- while the economy had
grown less than 4 percent. In dollar terms, the increase in value of shares on
the New York Stock Exchange alone was over $2 trillion, while the increase in
goods and services produced by the American economy was about $280 billion.
People were trillions of dollars richer, or felt that way, but there was only
billions of dollars' worth of additional stuff for them to buy. Economists talk patronizingly about the "money illusion," meaning the way
that feeling richer or poorer can affect how people behave, and therefore affect
the real economy. A rising stock market, for example, can give people the
confidence to spend money and therefore become a self-fulfilling prophecy. A
falling stock market can produce a recession. But the money illusion is backed by the full faith and credit of the United
States. A person whose stock portfolio has gone up by $100,000 believes -- and
is officially encouraged to believe -- that she has claims on $100,000 worth of
additional stuff. If she sells the stock today and buys the stuff tomorrow, she
may get $100,000 worth. But if claims on new stuff are proliferating faster than
new stuff itself, something's got to give. The current popular outrage about corporate governance is mostly sublimated
concern about declining stock prices, and at first it seems misdirected as a
political issue. But society -- and its proxy, the U.S. government -- really
have in effect promised many folks a level of financial security it is
mathematically impossible to deliver, and the anger as this becomes clear is
somewhat justified. Optimists during the bubble-boom years offered variations on three arguments:
First, that we were finally starting to enjoy the productivity benefits of the
high-tech revolution (i.e., time saved at the office by computer spell-checking
finally outweighed time lost by computer solitaire). Second, that we were
enjoying the benefits of general agreement about the crucial importance of a
stable monetary policy (i.e., there had been an "end of economics" that made the
path of wisdom obvious and therefore easy to follow). Third, and most
spectacularly, a few lunatics argued that a statistical error had blinded
everyone to the fact that stocks were already worth many times their current
value, and the Dow would soar to 30000 or 36000 as we figured this out. Pessimists rejected all these arguments and said that actual production of
new stuff could never catch up with the rising claims on new stuff. The gap
could only be closed by reducing those claims: either through inflation, making
$100,000 worth of stuff a smaller pile of stuff, or through a bear market, which
would eat up that $100,000 before we had a chance to spend it. Pessimists said, in essence, that the rise in stock prices was a matter of
counting chickens before they hatch. But holding stocks also has been a chicken
game of a different sort. Many have noted that baby boomers saving for
retirement are a major source of the demand that has propelled stock prices, and
that their imminent retirement could have the opposite effect. The oldest
boomers are still only 56, so this moment is still a few years off. Say 2008,
when the first wave hits 62. But we boomers aren't idiots. We don't want to cash out at the same time as
everyone else. The clever thing is to enjoy the ride up until, say, 2007, and
then enjoy watching others on the ride down. But you don't have to be very
clever to figure that one out -- and if too many people figure it out it's no
longer clever. The really clever thing may be to pull out in 2006. . . . Of
course if everyone figures that out, 2005 will be the magic moment. Or maybe
2004, just to be safe . . . Come to think of it, maybe we are idiots. Excuse me, I need to go make a
phone call.
THE END
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