KUHN CAPITAL Thursday, October 19, 2017
Dispatches from the front

Smiling Through the Apocalypse
(7/15/2000)

You Can Be Too Rich
Some of us realize by now that the ultimate target of Greenspan’s relentless interest rate squeeze is not the usual suspect, a generically overheating economy. It’s not even NASDAQ per se. It’s the Wealth Effect. To defeat the Wealth Effect, Greenspan has set out to tranquilize those “irrationally exuberant” tech stocks once and for all.

What’s wrong with too much wealth? According to Greenspan, too many newly rich people are spending their money too freely, creating so much demand for products and services that suppliers may raise their prices, thereby lighting the hellish fires of inflation. Translation: somebody complained to the neighbors and now Dad’s turning down the music.

But Greenspan must make an heroic assumption in order to believe that arbitrarily administering the bitter pill of rising interest rates is good medicine. He must believe that IT — the same force that created all this wealth — cannot continue to outrace inflation with ever-rising productivity.

IT Is It
Of course that’s precisely what it has been doing. IT has launched and sustained the greatest and longest Bull Market in world history by boosting productivity while smothering inflation. It took the academics a long time to understand or believe this, mostly because they still don’t have the tools to properly measure it. But IT has so effectively worked its miracles for so long that today it’s hard to find any reputable economist still arguing that the flip side of strong growth must be dangerous inflation.

In other words, most economists now realize that IT irrecoverably broke the old economy mold. It just seems that Greenspan doesn’t trust these new-fangled thoughts.

Yes, lots of those airhead tech stocks did get pretty wacky, the result of legions of Yuppies and their institutional surrogates piling on, convinced or praying that even greater fools were leaping into the abyss right behind them. Over the equity markets’ 200-year history this sort of thing has happened with regularity, and just as regularly these sorts of players reap the rewards of their imprudence.

But never before has it been so clearly one man’s perspective that swings the great sword of economic justice, at least in this country. And an indiscriminate, broad sword it is: interest rate hikes have slammed the market caps of the deserving and undeserving both, though the most crazed dot coms have quite rightly been brought the lowest. Perhaps if the market had been left to its own devices, though, these inevitable declines would have been more discriminate, less wastefully jarring. After all, there are great differences in quality among tech stocks!

Al in Wonderland
As it is, Greenspan and his Wealth Effect jihad introduce weird distortions into the free market logic of the world’s greatest economy. Today bad economic news like slowing growth is good news, pumping up stock prices. But rising stock prices is bad news, bringing on as it inevitably does higher interest rates. So tell us again — what’s “good news”? How do we know when we have arrived in the promised land? Is it when we finally starve IT of enough capital that we throttle down its most obvious benefits?

Ryan Kuhn


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