Revolution #9 Continued

Well, is it for real or not? Is this a once-in-a-lifetime event, marked by accelerated growth, corporate profits and productivity? Or is it just another bubble?

Our very own Dr. Kurt Richebacher has already provided the answer. He has shown that there has been no marked acceleration of productivity, output or corporate profits. Throughout the bull market of the last 19 years, corporate profits have risen, inflation adjusted, by only 61%. The S&P composite should have risen a similar amount. Instead, it rose nearly 10 times as much — 570%, again inflation adjusted.

And the chart in the “WSJ,” celebrating the longest expansion in history, shows that GDP growth rates have not accelerated at all. They are lower than they’ve been for most of the period from 1870 to 1981!

Productivity gains are largely a statistical mirage, too. If people really were more productive, they’d be earning higher wages. But wage growth has been lower than most preceding periods, not higher.

In short, there’s been no revolution on Main Street — where people live, work, spend money and get mugged. Life goes on as usual.

The revolution, if you can call it that, has been on Wall Street, where investors have come to believe in the New Era of the Internet and are desperate to get a part of it. While corporate earnings increased modestly, stock prices lacked all sense of modesty or dignity. P/E ratios on the S&P went from eight in 1981 to 32. Nasdaq stocks let it all hang out — rising to an estimated P/E of 200. The stock market as a percent of the whole economy went from 50% to 150%.

Dr. Richebacher identifies the source of this madness, too. Like the other “euphoric speculative bubbles that have dotted human history,” this one is caused by excessive credit. In the last four months of 1999, for example, the money supply, as measured by M3, rose by $340 billion, compared to about $200 million in the eight months preceding.

You can study the broad sweep of credit expansion by looking at the relationship of credit to GDP. At its previous peak, in the 1920s, there were $2 of credit created for every $1 of GDP. Today, the relationship is 4-to-1. This money explosion, according to Dr. Richebacher took “the stock market with it.”

How will it end? Dr. Richebacher quotes Ludwig von Mises, “There is no means of avoiding the final collapse of a boom brought about by credit expansion.” Watch this space.

But today I’m reaching for a more profound point. People believe in the New Era of the Internet as though it were, well, a profound revolution. Kids stay up all night, working feverishly on Internet projects, as if they thought they were doing something important. Not just something that might be profitable.

Like all new technology, the Internet will surely have a lot of unforeseen consequences — but nothing so far looks very profound, important or serious. So what if you can order a pair of Nikes or the services of Veronica on- line? Why the almost messianic faith?

The answer I believe is to be found in the way people long for revolutionary change. In Peter Weiss’s play, “Marat/Sade,” the Marquis de Sade explains why people make revolution. “One man has a fat wife and wants a skinny one. Another has a skinny wife and wants a fat one.”

Hitler’s childhood friend later recalled that when the boys would wander about the neighborhood, young Adolf would want to change everything. He would point to houses and say the roof should be lowered…or to roads and suggest that they should be moved elsewhere. He seemed to want to remake the entire world.

George Orwell wrote that revolutionaries “imagine that everything can be put right by altering the shape of society.”

An old friend of mine, Bill Strauss, wrote a book describing a kind of generational dialectic, in which each generation had its own personality and reaction to the one ahead of it. It is a hallmark of youth to think it can do better. There is always the danger that young people will embrace whatever silly idea is fashionable and, unless they are stopped, take it to grotesque extremes.

The French Revolution, which eventually brought Napoleon to power and his brother Jerome to Baltimore, might have been sired by the ideas of the Enlightenment — but it was the product of a baby boom in France in the late 18th century. So many young people, with their new ideas, were irresistible.

More than a century later, the ideas of another group of angry young men — Mussolini, Hitler, Lenin and Trotsky – – were irresistible. Again, it was the young who took to them, believing that they could make the world a better place.

Later, in America, another revolution gripped the young. I recall it well. People wore strange clothes. They discovered sex. They painted their VW buses psychedelic colors and took road trips. They invented new words and phrases…and new music. It was all very far out. They believed that something revolutionary was taking place in American culture. Something important. Something profound.

In the words of Bob Dylan, “Something’s happening and you don’t know what it is…do you, Mr. Jones.”

It was exhilerating at the time — though it seems as preposterous as a tie-dyed T-shirt now.

Remy de Gourmont said of the French Revolution that it was “nothing but the anger of a disappointed child.”

Today, the children believe they are remaking the world, too. The Internet, they believe, slouched to Jerusalem and now spreads its light upon the world. If you don’t believe…you just don’t get it.

But unless I’m wrong, not getting it may be better than getting it. The Internet revolutionaries may soon turn out to be like Robespierre or Jean Paul Marat..or perhaps Leon Trotsky — all victims of the revolutions they helped create.

Your faithful correspondent,

Bill Bonner

Off to South America February 4, 2000