THE BEAR'S LAIR 1995 and all that
By Martin Hutchinson
It is generally not apparent at the time, but some years in retrospect get
suffused with a golden nostalgia, as events take an unexpected and unpleasant
turn afterwards that leaves them remembered as the "last good year".
In some cases, this nostalgia happens immediately, as a major war or a huge
depression breaks out, cutting off in people's minds the future from the past.
In other cases, the change is more subtle, or represents just the beginning of
decline from a peak that in retrospect proves to be of long-term significance.
In the troubled US economy of today, it is increasingly obvious that one recent
year deserves to be bathed in such a roseate
glow, of perfection never to again to be attained. That year is 1995.
Earlier in the 20th century, 1914 and 1929, obviously in retrospect, were
bathed in a golden glow, as, respectively, the last years before the Great War
and the Great Depression; 1955, too, has a certain aura, as the peak year of
the Eisenhower bull market, in which the chief executive of General Motors,
Harlow H Curtice, was Time's "Man of the Year".
The next "last good year", 1973, was not all that attractive in itself. It
included the collapse of an administration, as Richard Nixon went from
triumphantly re-elected peacemaker to hounded clinger-to-office within the
space of less than 12 months. Economically, October 1973 saw the first oil
crisis, as the price of a staple of US life suddenly quadrupled. What had
appeared to be a non-inflationary recovery from the 1969-70 downturn turned
into an inflation-ridden nightmare, as the price controls of 1972 were removed
and recession began to loom.
Yet for the millions in America's blue-collar workforce, 1973, the end of the
great post-war productivity surge, deserves to be remembered with the greatest
affection - it was the last year before their living standards and
employability began an inexorable decline that has lasted to this day. Since
then, university graduates have done quite well, and most bankers have made out
like bandits. However, the high-school graduates and even high-school dropouts
who before 1973 could count on the American dream of a house in the suburbs and
gradually improving living standards at a level far above those enjoyed in any
other country or at any other period of history, have found their employability
eroded and their living standards decimated.
A few years on, notably in the late 1990s, and the rising tide has lifted all
boats. Yet most of the time, even generally improving living standards have
brought little to blue-collar lunch pails, and in times of turmoil such as
1980-82 and the last couple of years, the effect on the lower-skilled has been
truly devastating. Long-term unemployment soared last month to levels never
seen since the Bureau of Labor Statistics series started in 1948, and by and
large those poor guys aren't MIT graduates.
Nevertheless, for the current generation, 1973 is becoming a bit remote as a
lost Nirvana - after all, anybody now under 40 has only read about it in
textbooks. So we need a new year to hark back to economically as an example of
youthful perfection to which we all long to return. I suggest that 1995 is well
qualified to fill that role (well, in my case, that year was neither youthful
nor perfect - I was 45 and going through one of my recurring periods of
financial stringency - but you get the point).
For the US economy as a whole, 1995 was not a perfect year. Wall Street had
already begun its metamorphosis into a rent-seeking trading behemoth - the
derivatives scandals of Procter & Gamble, Gibson Greetings, Orange County
and the collapse of the London merchant bank Barings all happened in a 12-month
period in 1994-95. Culturally, we were also well down the road to perdition -
1995 was the year of the OJ Simpson trial.
The year 1995 was also the beginning of three changes in government, of which
one petered out in disappointment, a second has continued modestly useful and
the third haunts us to this day. The first was the new Republican congress, the
first in over 40 years, inaugurated on January 4 under the leadership of House
Speaker Newt Gingrich. It appeared at the time that this would genuinely reform
many of the economically dysfunctional features of US politics, including
notably giving the president a line-item veto, thus slowing the growth of the
economic deadweight of pork-barrel spending.
In the event, the promised reforms were derailed or were never even attempted,
with the exception of the moderately helpful 1996 welfare reform legislation.
Even the hopelessly damaging farm subsidies, reduced in 1996, were to be
restored in 2002. The promised movement to a freer US market, back towards a
Calvin Coolidge economy, simply never took place.
The second change was the inauguration on January 1 of the World Trade
Organization. This is about the only international body that is on balance
genuinely helpful to the global economy. It acts as a witches' chorus against
protectionism, taking advantage of fleeting moments of support for free trade
to push forward a barrier-lowering agenda that has produced much of the genuine
increase in prosperity that most of the world has enjoyed since 1995. It also
whacks US governments around the head with a 2x4 when they indulge in genuinely
silly protectionism like the anti-dumping action against Chinese tires.
The third, as readers of this column will be only too painfully aware, was the
change in monetary policy announced by Alan Greenspan elliptically to the
senate finance committee on February 23 of that year. Since that date, M3 money
supply has increased by about two-thirds faster than nominal US gross domestic
product. We have had asset bubble after asset bubble, in stocks, housing and
commodities. We have also had a perpetual US payments deficit and greatly
accelerated outsourcing to the Third World, as the natural US advantage in
capital costs has been negated by all the silly money sloshing around the
globe. The net effect of this change has been thoroughly destructive to US
industry, financial markets and living standards, and it's getting worse.
The first stage of the first great asset bubble happened in 1995. In that year,
the Standard & Poor's 500 share index rose by 34.1%, breaking decisively
above the gradually rising trend of the previous decade and soaring into the
stratosphere. By December 1996, Fed chairman Greenspan was babbling about
"irrational exuberance" - and he was at least six months late in noticing it.
Nevertheless, the 1995 phase of that bull market took place before the Fed's
funny money policies had time to take effect. Its cause was not cheap money in
itself, but an astonishing burgeoning of the technological possibilities of the
US economy - yes, and the world economy, but the nexus of the revolution was in
the United States.
By far the best publicized technological advance of 1995 was the advent of
Microsoft's Windows 95 operating system on August 24; this was to become the
best-selling operating system of all time and drive competitors out of
business. A little-known additional feature, included as an optional extra
initially but as standard from November, was Microsoft's first Web browser,
Internet Explorer.
The World Wide Web had been invented in 1992, the Mosaic Web browser had been
introduced in 1993 (it was succeeded as market leader by Netscape Navigator the
following year) and Amazon.com was founded in 1994. However, the explosive
growth of the Internet was centered on 1995. Traffic on Internet backbones had
been roughly doubling each year, reaching 16.3 terabytes/month in December
1994. Then over the next two years, usage exploded, reaching 1,500
terabytes/month in December 1996, thus multiplying almost 10-fold in each of
1995 and 1996 (growth slowed again to a mere doubling in 1997). The number of
Web sites in existence rose from 10,022 in December 1994 to 100,000 in December
1995, that 1,000% growth slowing to a mere 650% in 1996.
There were estimated to be 30 million Internet users by the end of 1995; the
number of Online Service Provider (OSP) subscribers (AOL and the like) doubled
during the year from 5.8 million to 11.5 million, but only during 1995 did a
substantial percentage of OSP subscribers (20% by year-end) start using the OSP
to reach the Internet, as distinct from merely sending e-mail.
Of the Internet services we use today, Yahoo was founded in March and e-Bay in
September (admittedly Google didn't start till 1998). What's more, the first
great Internet fortune was made with the Netscape IPO, which took place on
August 9, soaring from US$28 to $75 per share on the first day of trading.
Oh, and the DVD was launched in September.
In summary, 1995 was not only a year of rare political promise; it was also the
central year of by far the greatest technological innovation of its generation,
an innovation that is still changing the world year by year. That innovation
was mostly generated within the United States, and its initial gigantic surge
of wealth creation was overwhelmingly dominated by US companies and
entrepreneurs. In 1995, it was still possible to believe that not only was the
United States the leading world economy, but that it would go on being so far
into the future. Indeed, that belief seemed more rational in 1995 than it had a
decade earlier, as in the intervening decade communism had died and Japan had
slumped into its never-ending recession.
Even more than was nostalgia for 1914, 1929 and 1973, nostalgia for 1995 is for
Americans entirely rational. It's even intellectually productive - by seeing
what changed around that time we can identify the tendencies that need to be
reversed in order for that lost Nirvana to be - at least partially - regained.
With the right policies, we can hope that in some future year we will stand at
the cusp of another great technological leap forward - with Americans leading
the way.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-10 David W Tice & Associates.)
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