The following is an interesting article which, while it has no direct connection to Wave, is still worth reading (at least if you can get past Kudlow's politics, which I'll admit is a little difficult for me...)
Editor's note: In this column, which first appeared on CNBC.com last week, chief economist Lawrence Kudlow urges investors to forget about the Fed and look instead to the endless promise of technology.
With all the near-maniacal obsessing over Fed policy, investors, especially longer-term investors (the only serious wealth-creating investment is long-term) should not lose sight of the large number of very positive developments in the economy. Including the far-reaching impact of the Internet. The long bull-market cycle of prosperity is alive and well, Fed or not.
Here's the good news. Treasury bond rates have peaked. Consumer price inflation, though still over-reported from the absence of proper accounting for information technologies, is running at only 1.7 percent annually year-to-date, excluding the temporary oil shock. This is considerably less than last year's 2.4-percent pace.
Technology investment is growing at a phenomenal 40-percent annual pace, thereby expanding the economy's long-run potential to grow. Using this technology, worker productivity is increasing 5 percent a year in the factory sector (the only accurate output-per-hour count), 4.5-percent annually in non-financial corporate America and 3.5-percent for overall non-farm business. So, in general, productivity rates exceed the 3.5- to 4-percent rise in worker wages and salaries.
Thanks largely to productivity growth, business profits through mid-year have risen 16.5 percent from 1998, including a 44-percent gain for computers and software, a 41-percent rise in durable goods, 38-percent in telecommunications, 30-percent for retailers, 15-percent for financial services and 12-percent for capital goods and health care. This explains stock market gains over the past 12 months of 31 percent for the Dow, 24 percent for the S&P 500 and 53 percent for the Nasdaq. Pretty impressive wealth creation.
There's still more. Industrial production is rising 3.6-percent above levels of a year ago, while factories' capacity to produce is growing at a 4.1-percent rate. So the supply side of the economy is expanding rapidly, leaving plenty of room for future growth without straining resources.
Historically low interest rates and inflation are driving the deregulated economy, along with technological advances that are spreading incredibly rapidly among businesses and consumers. Speaking of diffusion rates, the U.S. Internet Council, a non-partisan lobbying group, reports that it took 38 years for the telephone to reach 30 percent of U.S. households, but the Internet has done it in only seven years. It took personal computers 13 years; television took 17 years. The whole economy is on technological fast-forward.
How Many Years Before 30-percent Saturation?
Source: U.S. Internet Council/Morgan Stanley
Right now, the Internet is more important than the Fed. Much more important. Easily accessible low-cost information and increased competition, the hallmarks of Internet economics, will contribute substantially more growth with significantly lower prices. Think of it as deflationary growth, a classic consequence of long-wave technology cycles. This is the new paradigm of the information economy. Right out of Joseph Schumpeter's playbook.
Two more factoids on this point. Over the past year computer production has increased 41.5 percent, while the computer price component of the Consumer Price Index has fallen 30 percent. Deflationary growth.
Look for the Internet wave to intensify and expand, with profoundly positive consequences for the stock market and the economy. Record-breaking venture capital investment is nurturing Internet innovation and high technology in general. PricewaterhouseCoopers reports that venture-backed investments in the second quarter of 1999 hit a record $7.7 billion, a 104-percent rise over last year and far above the previous record of $4.3 billion in the first quarter of 1999.
Internet-related company financing quadrupled to $3.8 billion, up from $947 million in Q2 1998. The number of companies receiving funds more than doubled to 412 from 174. Investments in this year's second quarter exceeded the total for all of calendar 1998.
Meanwhile, companies in biotechnology, communications, computers and peripherals, electronics, the environment, medical devices, semiconductors, software and information, plus Internet, accounted for $6.9 billion, or 90 percent of all venture cap investments in second-quarter 1999.
Venture capital is the lifeblood oxygen pipeline of technology advance, which itself is the backbone of the New Economy. Embryonic technology ventures require seed capital in order to be commercialized for mass consumption. These record venture capital flows, undoubtedly bolstered by the recent decline in the Federal tax rate on capital gains and the strong possibility of yet another cap gains tax cut in the near future, point toward an even greater velocity of technological innovation in the next century.
Now back to the Fed. Regrettably, Greenspan & Co. continue to stray off the price rule. Instead, they have wandered into the historical back alley of Malthusian limits to growth and employment.
This old-economy thinking, embalmed by the discredited Phillips curve trade-off between inflation and unemployment, reflects the tired wisdom of the ivied economics establishment, perhaps the most retrogressively conservative institution in politics today. Promoting the incongruous policy prescription of higher interest rates and paydowns of the federal debt, they have even abandoned the original Keynesian first principle of growth.
Growth is the DMZ intellectual dividing line in contemporary American politics. In economics, free-market supply-siders embrace it; orthodox economists doubt it. Culturally, optimists favor growth, while pessimists reject it. Ideologically, slumps born of austerity policies open the door for economic planners and bigger government influence. In other words, state-ism. However, prosperity from free-enterprise growth policies has no need for government targets and controls. The free market is the most effective regulator of resources.
In monetary policy, market prices are the most efficient regulators of the supply and demand for money. With gold low and the dollar index high, it is clear that the volume of money provided by the Fed is just about right. There is no need to withdraw liquidity or attempt to fine-tune the economy's growth rate. Today's growth is real, not inflationary.
Hopefully, Mr. Greenspan will soon move back to the price rule. That is the history of his tenure; Phillips curve relapses never seem to last long. Message to the Fed: Do no harm.
If, however, the economic establishment in and out of government continues to press austerity and pessimism, it will be confronted by a political tidal wave of opposition from the shareholders, farmers, seniors, homeowners, Website operators and users, venture capitalists, small business proprietors and others whom I term the new Investor Class. These asset owners believe that market incentives, not government planners, create wealth. They are fundamentally optimistic people who devoutly believe that more growth and prosperity and people working is a good thing.
They will not permit new tax, inflation, trade and regulatory obstacles to impede free enterprise. They know that entrepreneurship spells opportunity. They will vote their portfolios to reduce government obstacles. They are young and old, rich and unrich, black, white and brown, men and women.
In their lifetime, they have seen that enhanced economic freedom over the past two decades has unlocked the benefits of science, technology, knowledge and information to ordinary people. This, in turn, has unleashed their God-given talents to prosper, provide service and achieve greater happiness. Having tasted the fruits of this prosperity, they will seek more, not less.
Think of the Internet as an economic freedom metaphor for our time. The Internet empowers ordinary people and disempowers government. The Internet creates wealth, expands growth, produces jobs and spreads prosperity. Standing behind the Net is the political power of well over 100 million investors and asset owners.
Because of this, I believe the future economy will outperform all expectations. The Dow average will head toward 15,000 in a few years, then 30,000, then 50,000 and higher. Believe it or not, the Internet is more important than the Fed.
CNBC.com Chief Economist Lawrence Kudlow also serves as chief economist of Schroder & Company, Inc. |
