So where are we now? We are where we always are: delicately balanced on the edge between greed and fear, between great prospects for the future and the possibility of grave disaster, between risk and reward.
Here are some of the most important factors at play:
- Peace. With our military budget cut from about 6% of GDP to 3%, our economy suffers that much less drag. Relatively speaking, directing our resources to pay soldiers or to blow up targets in training missions — while obviously important — adds less to economic progress than directing those resources to industry or education.
- Technology. The pieces of the puzzle are fitting together faster and faster, with simply dazzling results. Things barely imagined two decades ago are routine, as we take three-ounce phones from our pockets and all but instantly reach the ear we seek 12,000 miles away. Things that seemed impossible two decades ago are now around the corner — cars that routinely got 12 miles to the gallon in 1972, or 25 miles to the gallon in 1992, could get 80 miles to the gallon in 2002. A quantum leap in efficiency.
- Free Markets and Trade. NAFTA, GATT — the world has been moving toward freer trade and toward market-based economies. Russia may have come out of its seven-year economic collapse as the seeds of capitalism have taken root. Even Africa may be stirring. This is good for world economic growth and also for keeping U.S. inflation low.
- Demographics. We baby boomers are saving like mad for retirement. And the younger generation, realizing that Social Security won’t be enough to provide a comfortable retirement, are funding their 401(k)s as well. Month after month, new money pours into stocks, driving their prices higher, with no letup in sight.
- War. One way or another, the Iraqi crisis will pass. But one can envision a scenario under which we turn the next generation of Iraqis into bereaved fanatics, each of whose mission it becomes to go abroad with a small aerosol can.
- Technology. What if the apocalypse is brought not by four horsemen but rather by this preposterously simple, silly technological glitch — the Year 2000 problem? Wouldn’t that be ironic? Most businesses and government agencies may have perfectly patched or replaced their “legacy” software by then. But in a world so interconnected, even a small number of problems could have ripples. Or what if, instead of aerosol cans, those Iraqis who’d seen their loved ones killed by our bombs took up their computer keyboards instead, devoting their lives to hacking into and destroying confidence in our computer networks? I’m not remotely predicting any of this. But the financial panics of old — the bank runs, and such — were always paper-and-pencil based. What would our first true high-tech panic look like? How quickly might it spread?
- Protectionism. What if Congress’s denial of “fast-track” authority to President Clinton a few months ago proved to be the peak of the free trade cycle? What if the problems in Asia led to beggar-thy-neighbor competitive devaluations? What if that made the price of Japanese cars so cheap Detroit had to call for protectionist quotas? And slash its dividends and throw a significant chunk of its people back onto the unemployment line?
- Demographics. As Japan and America age, the ratio of strong young workers to elderly retirees steadily shrinks. What happens to the stock market when, some hoping to “die broke” and others having no choice, we stop piling money into the stock market and begin piling it out?
My own view of the future is far more positive than negative. But that doesn’t mean, with stocks at record levels, we have nothing to fear.