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New Era, Old Truths

Remember the Dot Com bubble...?

The FERRY from Cherbourg was calm, almost eerily silent all the way to Dublin, writes Bill Bonner in his Diary of a Rogue Economist, reporting from Youghal, Ireland.

Truck drivers sat drinking their beer. Retired couples collected their trays and ate their dinners. Some chatted in French. A few spoke Polish with the ship's crew. Most were Irish, speaking with each other softly.

It was nothing like the scene on the same boat six weeks ago. Then, there were children everywhere, scrambling about, shrieking and making a joyful noise. It was as if their schools had all burned down and vegetables had been taken off the menu. They were on their way to France for a family vacation, happily running wild while their parents exhaled.

But on Sunday, the ship scarcely had anyone on it under the age of 50. Children are back at school. Parents are back at work. And so, now, are we.

We knew next to nothing about economics when we began writing this Diary 20 years ago. We discovered the economic world along with our long-suffering Dear Readers, dot by dot, error by error, claptrap by claptrap.

Now, we know a little more than next to nothing. But what we know most of all...and are absolutely confident that next to nothing is about as good as it gets.

Neither we nor anybody else will ever know, in detail, how an economy actually functions.

An economy is a natural thing, evolved, not designed.

It responds to billions of inputs...past, present, and future...far too numerous, ambiguous, and subtle for any person, group, or computer algorithm to master...aggregating the desires, fantasies, and desperate midnight terrors of billions of people, each with his own "information".

Any attempt by a few people to impose their own vision on it only distorts it, subverts it, and corrupts it.

That's why central planning – either the hard version of the Bolsheviks...or the light version of Republicans and Democrats...or the bizarro version of Donald Trump – always retards growth and reduces satisfaction.

Not only can the feds not possibly have access to all the facts...nor see how they all fit together (does little Billy want a chocolate ice cream...or a moon pie?)...the most important inputs are not "facts" at all...but wily trends, fads, and fluid preferences that can never be predicted.

Just when the feds have finally figured out how to get Billy more chicken tenders, he grows up and becomes a vegan!

Summarizing all we learned over the years:

Almost everything you hear about public policy as it relates to the economy is nonsense.

The Federal Reserve "adjusts" interest rates...the authorities aim to boost "demand"...inflation is too low...inequality is too high...the Chinese don't play by the rules...


Let's look at why this is such drivel by backtracking over the last two decades to see more of what we've learned.

We began connecting the dots in 1999. Then, the US was at the height of its power, wealth, and prestige. The economy had been growing at a 4% rate. Consumer price inflation was less than half that much. And the stock market was booming.

And yet, something wasn't quite right. It took only one ounce of gold to buy the 30 Dow stocks in 1980. By 1999, it took 40 ounces.

Were US stocks really 40 times as valuable? Not likely.

That was when it was widely believed that the "information" would make us all richer.

Back then, dot-com stocks were "information companies" and were being valued not by how much money they made, but by how many "eyeballs" they had watching them.

Companies that had been in mining or schmatta simply added a dot-com to their names, and suddenly they were worth twice...three times...ten times as much.

Meanwhile, time, savings, and physical resources were going out of style. With the World Wide Web, we had all the information in the world right at our fingertips. And with so much information available, the promoters argued, mistakes would be things of the past.

The enlightened PhDs at the Fed, for example, would be able to find exactly the right interest rates at exactly the right time. No more bad investments. No more misallocated resources. No more wasted time and capital.

We could look forward to a glorious future of stunning technological breakthroughs...

...because now even the most backward hillbilly or Hottentot in the most godforsaken outpost of Christendom could go on the internet, discover the secrets of advanced nano-molecular chemo-engineering, and find a cure for cancer...

...or at least invent a new app that makes it easier to follow Miley Cyrus' lesbian love affairs.

Thus, glowing in the radiant beauty of the New Era, the dot-coms went crazy. Between September 1998 and March 2000, the Nasdaq tripled. Companies that never made a dime of profits – and never would – were said to be worth billions of dollars.

Most remarkable, a whole new species of human being appeared: Silicon Man. The old model, Homo sapiens skepticus, wondered what the hell was going on.

"How could these companies possibly be worth so much?" he asked.

"You just don't get it," replied Silicon Man.

Your humble correspondent was among those who didn't get it. In his experience, from having a large family and starting a business, he often lacked time, talent, wisdom, brains, energy, or resources.

Not once could he recall a shortage of information. To the contrary, he was often overwhelmed by too much information – too many facts...too many opinions...too many possibilities.

What if General Custer had carried an entire set of the Encyclopedia Britannica with him on the western plains, he wondered; would he have steered clear of the Little Bighorn?

And suppose Hitler's generals had had access to Armand-Augustin-Louis de Caulaincourt's history of Napoleon's woebegone Russian campaign; would they have kept the Wehrmacht in their barracks in Westphalia?

But wait...they DID have Caulaincourt's memoir. And they launched the invasion anyway.

Classical economics didn't help either. Smith, Bastiat et al. – in this New Era, were these antiques worthless?

They had taught that building wealth was a long, hard process...saving, learning, developing skills and habits, discovering what people wanted and figuring out how to best give it to them.

And now, none of that seemed to matter. Computers and information technology had replaced the need for discipline, rules, forbearance, saving...and all the other virtues that made civilization possible.

Or so they said. Again, it didn't seem likely.

But when your editor expressed his doubts, many Dear Readers were upset. They were already counting the money the New Era would bring them. They thought the old insights no longer applied. They said they had no need for his fuddy-duddy views.

One of his own partners predicted that his business – providing financial ideas, opinions, and recommendations...based on old-fashioned analysis and classical economics – would soon be made obsolete by the new communications technology.

"It's all out there on the internet already," he said. "All the information you could possibly want."

But the world is not always kind or easy. Especially to those who invade Russia, forget the past, or think they know the future.

Sometimes those who "get it" best...get it good and hard.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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