Why an Economic Downturn Begets a Technological Renaissance

The Old World is looking older by the day, as most European stock markets fell yesterday for the sixth time in seven days. Here in the New World, the Dow Jones Industrial Average tried to buck the trend, but did not succeed.

Around midday in New York, the Federal Reserve issued fresh assurances that it stands at the ready – if the economy continues struggling – to do even more of what hasn’t worked. The Dow jumped about 70 points on the news, but failed to hold its gains. By day’s end, the Dow was down 59 points at 12,447.

According to the newswires, the Dow fell late in the day because Moody’s downgraded Ireland’s credit rating to “junk” – making the Emerald Isle the third of the five PIIGS nations to suffer this particular ignominy. Moody’s downgraded Portugal to junk about one week ago and downgraded Greece about two months ago.

The grim news flowing from Europe seems as good a reason as any to sell stocks. And this morning’s headlines don’t look any better than yesterday’s. Greece continues racing toward its inevitable default – a fait accompli that has become so obvious even a finance minister can see it.

Thus, the EU finance ministers are putting their heads together to come up with a brand new way for Greece to default without technically defaulting. The ministers are convening an “emergency summit” on Friday to discuss “some form of Greek default.” These are the same finance ministers, of course, who have spent the last 18 months ruling out any possibility of a Greek default.

But let’s not blame the ministers. They’re just doing their job – denying the obvious until the day it comes to pass. The Greeks will default – almost everyone knows that by now – and whatever comes next is unlikely to be pleasant.

But in the midst of this doom and gloom, investors should not lose sight of the opportunities before them. Periods of economic distress tend to germinate the seeds of capitalistic success. As Frederick Nietzsche observed more than a century ago, “You must have chaos within you to give birth to a dancing star.”

Panics, depression and stagflations have an uncanny knack for producing successful capitalistic enterprises. Whether it is cause or effect or a pure accident, great companies often emerge from the depths of very bad economic conditions.

Fortune Magazine, Revlon Cosmetics and Hewlett-Packard all came into being during the Great Depression. Similarly, Procter & Gamble opened its doors during the Panic of 1837, General Electric turned on its lights during the Panic of 1873, General Motors started bending metal during the Panic of 1907 and Microsoft first opened its Windows during the stagflationary recession of 1975.

In each of these cases, capitalistic enterprise flourished, despite the pervading economic gloom.

“People always think the current economic state is permanent. They’re wrong,” Patrick Cox, editor of the Breakthrough Technology Alert, declared at last year’s Agora Financial Investment Symposium in Vancouver, Canada. “The world goes through cycles. We’re in the middle of a terrible downturn right now, and that means the opportunity out there is amazing. Nylon, television, radio, neoprene, home refrigerators… They all took off in the Great Depression.

“Transformational technologies are taking off again, right now,” Patrick insisted, “But no one’s talking about them because people always fear change. Make fear your friend… Put money in transformational technologies. This is your chance!”

Recently, Patrick expanded upon his remarks from the Vancouver conference:

The Great Depression of the early 1930s was one of historic technological progress as well as investor opportunity. Visionary investors who believed in the emerging technologies of electronics, radio and home refrigeration did well even during the downturn. Eventually, they earned fortunes.

For many, the Great Depression seemed like the end of the world. It was difficult to see a brighter future. If you were an investor then, however, there were a number of enormous and obvious technological trends changing the way people lived. One was radio. For the first time, Americans had a way to bring real-time news and entertainment into their homes. Radio boomed in the darkest days of the Depression. Forward thinkers who invested in the underpriced stocks of brand-new companies like Motorola would become rich.

Another new technology, home refrigerators, was also transforming America. Electrical refrigerators saved consumers money by allowing them to buy and preserve larger quantities of food. Market penetration of home refrigerators accelerated during the Depression.

In fact, technological innovation gave those who believed in the future huge ways to ride a financial wave to future riches. The ideas behind Hewlett-Packard, Texas Instruments, Xerox and Unisys were born in the depths of the Depression. The lucky few who invested in these ‘science fiction stocks’ laid the foundations of fortunes. Emerging technologies like neoprene and nylon offered similar opportunities.

We’re there now. Nearly unbelievable technologies are emerging today. Better yet, a fearful market has seriously underpriced these revolutionary technologies.

Ray Blanco, editor of Technology Profits Confidential, embraces Cox’s philosophy wholeheartedly. “It is easy for us to get discouraged in this economic climate,” says Ray, “but we shouldn’t. We are living in the most technologically productive period of all history.

“The negative parallels between now and the Great Depression are not lost on many, yet the positive ones are,” Ray continues. “Most people do not realize how technologically productive the 1930s were.”

“The years 1929-1941 were, in the aggregate, the most technologically progressive of any comparable period in US economic history,” according to a paper published in The American Economic Review. Professor Alexander Field of Santa Clara University supports this assertion with two main points:

  • Businesses implemented or adopted new technologies and practices on a more widespread basis. The result was “the highest rate of measured peacetime peak-to-peak multifactor productivity growth in the century.”
  • Researchers produced advances that expanded businesses’ reserve of production techniques. This, says the professor, provided “the basis for much of the labor and multifactor productivity improvement of the 1950s and 1960s.”

“Discoveries and innovations are being made right now,” says Ray, “that will create vast fortunes in the years to come.”

Eric Fry
for The Daily Reckoning

The Daily Reckoning