The year 2000 that recently ended was not a good year for stocks, which is not to mention for the people who invested their life savings in them with dreams of an early retirement in mind. After a long bull run of several years that made many people paper millionaires, there was a huge drop in stock valuations that left the T-Bill as the only thing showing positive growth for the year. Although the Dow Jones Industrial Average was down, the drop of the NASDAQ composite index was so great that stock market commentators have called it a "carnage." The U.S. Federal Reserve tried to do some damage control this month by lowering the overnight lending rate by 100 basis points, but that was little more than the fire department spraying water on the smoldering ruins of a burnt down building. Investors are still hoping that the Fed will lower interest rates more aggressively, but the sad fact of the matter is that it takes months for the full effect of interest rate decreases--or, for that matter, increases--to fully affect the economy. The only hope left for stock investors is probably a tax cut from the Federal government, but signs are that that will be too little too late, even if it is approved.
Exactly why the NASDAQ took its nose dive from a high of 5,048 in March 2000 is now a subject of much debate. Some opinion leaders--with an obvious political axe to grind--blame this disaster on the U.S. Department of Justice winning its case against Microsoft Corporation. However, if that were true, investors would have just sold off their shares of Microsoft stock and purchased the stocks of Microsoft's rivals. Others blame it on the financial analysts, some of whom got very rich orchestrating the dot-com feeding frenzy, and others who gained considerable fame by issuing warnings about the lack of dot-com profitability. But even the dumbest of investors should have realized that the dot-com businesses, most of which had never earned a profit from their various Internet-based business models, were an extremely risky bet. Still others blame Japan, which has yet to clean up the massive bad bank loans problem that resulted from its pronounced economic downturn in 1990. Unfortunately, this is an argument weak in logic, since those same bad bank loans have been there all along during the 1990s while stock prices were rising astronomically on Wall Street.
One thing is for sure, though. When NASDAQ stock prices collapsed like a house of cards in 2000, they took down more than the market cheerleaders and the gullible investors who believed them. Another casualty was the concept that a brand new economy could somehow be created merely through the introduction of the Internet and information technology (IT). True, some new types of businesses can come into existence as a result of the introduction of networks and computers. NTT DoCoMo Inc. has proved that through the success of its i-mode wireless Internet handset business. But the idea that a completely new economy can come into existence separately and grow independently of market forces in some kind of recession-proof bubble was and is nonsense. New technologies are tools, and tools are only useful to the extent that they improve the efficiency of existing businesses. The TRON Project, which has as its goal the creation of a total and open computer architecture for computerizing human society, has--as one can now see in retrospect--been very fortunate in that it never used a term like the "new economy," which could have easily led to it getting sidetracked.
Although Americans are not going to experience a new economy based on IT, they are probably going to experience new economic realities as a result of having bet their life savings on one. Already, the steep, continuous decline of stock prices, the slow build up of fear, and the worsening balance sheets of companies are making the U.S. economy in the early 2000s resemble the Japanese economy in the early 1990s. The end of Japan's bubble economy has led great changes in a country that prides itself on stability, so what the same phenomenon will do in the U.S., a society that thrives on and is built around change, staggers the imagination. U.S. companies have no qualms about laying off workers; the U.S. government stops counting you as unemployed once your unemployment insurance runs out; you are only eligible for five years of welfare benefits after your savings run out; and if you become homeless, there are few resources available to help you. If the U.S. does enter a long period of stagnation like Japan is currently in, the only advice I can offer is to learn from this debacle the value of savings. Japan's strength lies not just in its technological prowess, but also in its vast pool of personal savings.