Where the money went...

[Kurt_and_Hunter]

In the mid-1990s computerization and the nascent internet increased productivity. (Much as the railroads and electricity increased productivity.)

That productivity increase was "free" in that it was driven by novel technologies/circumstances. Things like "Just in time" inventory were feasible for the first time. (People were not using the internet better than they had in the 1950s. They were using it for the first time.)

The easiest 'low hanging fruit' productivity gains were one-time advances, but people saw the curve and extrapolated exponential rises on corporate profits going forward.

The stock market went up a lot. First, for good reason because productivity does mean higher profits. Then because people were excited and the prospect of novel technologies promised that it might be "different this time," meaning that old rules of money and markets could be disregarded.

So we get the internet bubble, abetted by the low interest rates Clinton had sought since '93. (Deficit reduction and world peace=low rates.) Interest rates are a key factor in ALL stock market valuation. The internet bubble was also fueled by millennial fever, showing that people are no more advanced than we ever were. A digit changing on the calendar is a piss-poor reason to buy stock in worthless companies, but c'est la vie.

February-March 2000 the internet bubble starts to deflate.

People, thinking they have learned their lesson about buying worthless securities and will be good now, begin piling money into land... the safe, secure, traditional investment. A housing bubble forms, but it is really just the internet bubble in new form. The "hot money" has to go somewhere.

So we get a housing bubble, abetted by 9/11. Interest rates were slashed to counter a very real level of global psychological insecurity that was largely induced for political gain after 9/11.

Then the Housing bubble peaked in 2006. Where can the hot money go? Nothing is more fundamentally sensible that LAND, right? In the move down the ladder toward more prosaic investment vehicles there is another rung below land...

COMMODITIES. Oil. Gold. Corn. Gold rockets 2006-2008. Food does too. And Oil zooms to $150/barrel. (I have revisted my opinion of the soundness of last years oil prices. They were bubbliscious!)

And then the commodity bubbles burst. The final act. There is only one thing below commodities on the conservative investment ladder... cash!

Ironically, cash is the best growth investment in a deflationary environment. I say ironically because when people hoard cash you get deflation, so it is a self-reinforcing behavior.

So that's my view of where the money went... Stocks > Land > Commodities > Cash. And now we have no choice (for real) but to devalue cash to try to break the threat of deflation. We need to make holding cash less smart, and inflation does that. Inflation makes cash like a hot-potato... get rid of it before it goes down more!

I guess we need to scare cash out of people's hands back into commodities, and so on back up the ladder. An ugly picture, but there we are.

[Kurt_and_Hunter]

1. Forgot to add,that suggests that the first sign of recovery will be higher oil prices

So, ironically, a measure the "man on the street" inexplicably associates with a bad economy (high gas prices) is the canary in the coal mine. Higher gas prices would probably be the most promising thing we could see.