The New Era of Wealth [Secure eReader]
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eBook by Brian S. Wesbury
eBook Category: Personal Finance
eBook Description: In the last half of the 19th century, the Industrial Revolution sparked a remarkable, historic series of innovations--the first transatlantic telegraph cable, electric lights and motors, automobiles, telephones, and more. This process of discovery and invention led to a noninflationary boom in economic growth, and the United States became the most powerful, most influential nation in history. Today, we are witnessing the same phenomenon. Computers, fax machines, the Internet, cellular telephones, satellite communication systems--all of these technological developments and more are working together to increase productivity and efficiency. Inflation is at its lowest level in years, while entrepreneurial activity is at an all-time high. Smaller government, fewer regulations, and lower taxes have created an ideal environment for innovation. America has entered a new era of wealth ... and the wealth produced by that innovation is flowing through every level of the economy! In The New Era of Wealth, influential economist Brian Wesbury tells you how take advantage of this transformed economy--and build long-term wealth for yourself and your family. This groundbreaking book reveals five key trends that will continue to feed the economic boom; four simple strategies to take advantage of those trends; the truth about today's P/E ratios--and why higher is sometimes better; 4 threats to the new prosperity--how to see them coming and sidestep them; and more. Far more than just another "How to Make Money" guide, The New Era of Wealth is a comprehensive analysis of America's exciting new economy and the opportunities it provides. Filled with fascinating case histories, solid research, innovative investing strategies, and a sense of optimism that is both realistic and refreshing, it will change the way you view your place in today's economy--and send you into the new millennium armed with a wealth building program designed to minimize your long-term risk as it maximizes your return.
eBook Publisher: McGraw-Hill Companies, Published: 2002
Fictionwise Release Date: June 2002
When I graduated from the University of Montana in the early 1980s, the economy was in recession and finding a job that fully utilized my education and training was almost impossible. Today, a single college graduate can start a bidding war between two companies and computer scientists can virtually write their own ticket. Not only have jobs become more plentiful, but wages are rising faster than inflation, the stock market has soared, interest rates have fallen, and the United States has become the most powerful economy the world has ever seen. This begs a simple question. And from that simple question, this entire book flows. How did the U.S. economy turn from the miserable stagflation of the 1970s, into a New Era economy that continues to create wealth at an astounding rate? The answer means everything, especially for investors. This book, and the analysis that it contains, will help you understand the forces that created this New Era. By understanding these forces you and your portfolio will be better prepared for the next 20 or 30 years of prosperity.
Something special has happened to the economy and, more importantly, its foundation seems solid. As the biblical parable tells us, a house built on a rock can withstand a storm, but a house built on sand cannot. So our one question leads us to others. Is the U.S. economy built on a rock, or on the sand? Are we lucky or have we truly done something right? Can the boom disappear as fast as it came? While the answers to these questions are important for our future investment strategy, this book is about more than making money; it is about creating wealth. It is about what conditions make it easier for all of us to create wealth. Wealth is more satisfying when it is widespread, and when wealth is widespread, creating our own personal wealth is that much easier.
I know my job search experience in the early 1980s was shared by many. Interest rates, inflation, and unemployment were in the double digits, stocks were stagnant, and the economy was like a yo-yo with one recession after another. Today, it is hard to remember how bad those times were, but many forecast that the bad times were here for good. In 1979, even before the recessions of the early 1980s, Robert Lekachman, a prominent economist and frequent editorial writer for The New York Times warned, "The Era of Growth is over and the era of limits is upon us." He was wrong and those dismal times have now become a distant memory.
In what seems like no time, the United States has entered a New Era of Wealth. Historically the US. economy has ridden an up-and-down pattern of growth with constant battles against inflation, but the New Era economy has been and will be different. It will be characterized by strong growth, low inflation, low interest rates, and rising stock prices. The New Era economy is being driven upward by innovation and ideas and as a result, its closest comparison would be the Industrial Revolution. However, because of the unique technology of the Internet and telecommunications this New Era will be even more powerful. The risk of owning stocks will decline and great wealth will be accumulated.
An analysis of a simple set of five trends suggests that this New Era of wealth creation will continue for decades. How can I be so sure? History shows, that when these five trends work together, rapid accumulation of wealth occurs. These five trends are self-reinforcing and have momentum. They are here to stay and so is the New Era in which they thrive.
These five trends, listed here, are discussed at length in Part I.
- Technology -- While the history of the world is one of innovation and improvement, the advancements made in computers and telecommunications in recent years are special. They operate using the law of increasing returns and have increased productivity faster than at any time in U.S. history.
- Globalization -- As technology makes the world smaller, the United States benefits because of its relatively free markets and sound currency. Not only does the U.S. economy benefit because of increased capital flow, but an increase in global trade also increases efficiency while holding down prices. An integrated global economy makes everyone better off.
- Fiscal policy -- It is not a coincidence that the New Era began in the early 1980s. Government policy, which for so long was focused on redistributing a larger share of U.S GDP and regulating business, shifted in the early 1980s toward a smaller and less intrusive style.
- A shift in our political culture -- The shift in U.S. policy during the early 1980s and the collapse of socialism in the late 1980s reflect the ascendance of market capitalism. From the United States to Bangladesh, citizens have begun to believe that individual responsibility, rather than government responsibility, is the best way to improve living standards. In addition, more Americans own stocks than ever before. These two facts make it almost impossible for politicians to reverse course. As a result, the positive fiscal policy environment is likely to remain in place.
- Monetary policy and inflation -- The huge decline in inflation from over 13 percent in 1980 to less than 1.5 percent in 1998 and 1999 has boosted stocks and lowered interest rates. The drop in inflation is the result of two forces: rising productivity and an improved Federal Reserve policy. Low inflation and price stability are essential to the creation of wealth.
THE PESSIMISTS ARE WRONG
In the mid-1980s, the eternal optimist Don Zimmer was managing the Chicago Cubs. The team returned from an eight-game road trip after splitting their games with opponents. As I recall, the Chicago sportswriters were not impressed with this .500 record and gave Zimmer a hard time. At one point in the press conference, Zimmer got frustrated and said, "I know we were 4-4 on the trip, but you should understand that it could have easily gone the other way."
To Zimmer, it all depended on how you looked at the situation. The economy and financial markets are no different. Both optimistic and pessimistic investors can find evidence to support their moods. Recently, the optimists have found support in the data. Today, many individuals finally believe that they are better off than their parents were and the economy continues to blow away dismal projections. Optimists are having a field day.
But the pessimists have loaded bats too. The Asian economic miracle turned into the Asian economic nightmare. Russia has collapsed and South America is stumbling. Fears of both inflation and deflation strangely exist at the same time and according to some analysts, the Year 2000 (Y2K) problem threatens a worldwide recession. All of this, some argue, has pushed frothy U.S. financial markets to the brink of collapse.
Pessimists, thinking that it could have "easily gone the other way," and may do so shortly, are everywhere. This group views every stumble in the markets as the beginning of the end. They also believe that if it were not for a few temporary "fortuitous circumstances," inflation would be bubbling while financial markets tumbled.
In April 1998, a cover story in The Economist highlighted "America's bubble economy" and suggested that a market and economic collapse were on their way. Four months later, The New Yorker magazine published an article titled "Pricking the Bubble" in which its author, John Cassidy, wrote that "the parallels [between 1929 and today] are striking."
In October 1998 another magazine, Esquire, not known for its business acumen, published an article titled "The Coming Economic Collapse." In that article, Walter Mead wrote that the economy was experiencing a "storm of the century, an economic cataclysm as big or bigger than the Great Depression of the thirties."
Granted, most of these articles were written during the global financial crisis of 1998, but underlying their analysis was a forecast that the New Era had to end soon. With forecasts like these, optimists begin to look like Pollyanna. But optimists have history on our side. For over 200 years, the United States has consistently created wealth faster than any other nation on earth. The reason for this is our belief in individual initiative, entrepreneurship, and the Rule of Law. Despite the consistency of wealth creation, the United States has gone through long periods of both stagnation and growth. Typically these periods last 20 years or so; however, every once in a while, we enter a period of 40 years or longer when wealth creation accelerates such as it did during the Industrial Revolution between 1870 and 1910. Today is one of those times, which is why the U.S. economy remained virtually untouched by the 1998 global financial crisis.
The optimists are right and the pessimists are wrong. Bad bounces or broken bats may affect the final score of a single baseball game, but over a 162-game season the quality of pitching, hitting, and defense become the deciding factors. The economy is no different. Underlying economic strength is not determined by luck, but by the fundamental economic factors of investment, entrepreneurial innovation, and risk-taking. And the best way to encourage these developments is for policymakers to strive toward free markets and price stability.
THE SEEDS FOR THE BOOM
If we step back 18 years and look forward it is easy to see why the current economic boom was so hard to imagine. In the early 1980s, the U.S. economy was in deep recession and pessimism was rampant. Inflation and unemployment were in double digits and Ronald Reagan became president by asking the question, "Are you better off today than you were four years ago?"
This question rang true. In the early 1980s, after adjusting for inflation, stock prices were between 60 percent and 70 percent lower than they were in 1965. Even after including dividends, total returns for large corporate stocks were negative between 1965 and the end of 1981. More importantly, incomes were sliding and interest rates shot above 20 percent. Even President Carter used the word malaise to describe the economy he presided over.
While it has become popular to blame President Carter for the bad economic times, they did not sprout up overnight. The problems had been building since 1965. The Lyndon Johnson-driven Great Society programs of the mid-1960s expanded government spending rapidly. Taxes rose to pay for that spending and the increased military budget for fighting the Vietnam War. It was in the early 1970s, however, under President Nixon that redistributionist government spending grew the most.
As the economy stumbled under the weight of higher taxes and bigger government, the Federal Reserve began to stimulate the economy to keep it moving. Eventually the burdens of government drove up unemployment and easy money boosted inflation. This forced Nixon to close the gold window and initiate wage and price controls. While many want to blame outside forces such as OPEC for our problems, they were entirely homegrown. Nonetheless, the U.S. economy has completely rebounded from those depressing times and has now reached what Federal Reserve Board Chairman Alan Greenspan said is "as impressive a performance as any I have witnessed in my nearly half-century of daily observation of the American economy."
During the past 17 years, inflation-adjusted, per capita net worth rose by nearly 70% -- from $80,700 in 1982 to $136,250 in 1998. That bears repeating. In 1998 the average net worth of every man, woman, and child in America was $136,250.
More U.S. citizens own stocks today than ever before in our history. In addition, inflation-adjusted incomes have climbed for 5 consecutive years. The United States has become a wealth-creating machine all over again and the whole world will eventually benefit.
Copyright © 2000 by The McGraw-Hill Companies, Inc.