Bill Crutchfield's Troubling Thoughts about the 'New Economy'
I have a theory that, during both of these remarkable times, two common factors emerged. First, these dramatic technological and social changes caused people to lose focus on some time-honored, free-market fundamentals: they discounted risk from their decision-making processes, and they based value on unrealistic perceptions. Second, dramatic economic corrections occurred as a consequence. In 1893 and in 1929, natural economic forces started the painful processes that brought us back to reality.
I am not suggesting that we are headed into depression. We are not. However, I am concerned about the economical, social and psychological similarities of our recent times with those of the 1880s and 1920s. In the past few years, we have been told that certain new technologies are transforming the world. However, from a historic perspective, one could argue that they are not as transformational as the railroad, electricity, telephone or the automobile. The entire "dot-com" fiasco clearly demonstrates that risk was greatly, if not totally, ignored. Consumer spending coupled with a negative savings rate may demonstrate that people are basing their wealth on unrealistic perceptions and not on reality. And, the belief that Alan Greenspan is an economic magician who can keep us out of recession demonstrates the 1920's "end of the economic cycle" mentality. As a result of our recent exuberance, equity and real estate markets have soared, venture capital has poured into unviable companies, consumers and businesses have leveraged themselves with excessive debt, personal saving rates have fallen to negative levels and personal consumption has exploded to unsustainable and even ridiculous levels. This is not natural. As history has demonstrated repeatedly, natural forces correct periods of economic aberration.
All of these philosophical factors are even more troubling when we combine them with the hard economic fundamentals that currently exist—prolonged, high energy costs, rising unemployment, eroding consumer confidence, deteriorating personal and corporate financial strength, weakening foreign economies, a manufacturing sector in recession, falling worker productivity and the negative wealth effect caused by plunging equity markets. Of all these factors, I am most troubled by the negative wealth effect. Only economic historians will be able to fully understand the effects on an economy when its people lose so much wealth so quickly. By some accounts, we have lost over $4 trillion in the past year. If the equity markets continue to fall and the real estate bubble pops (its acuity varies by sectors and regions), this figure could go much higher.