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So, why isn't everyone still rich? Was it a terrorist plot? Did greedy corporate leaders steal the missing $6 Trillion? Did the Grinch take it? Did the money ever actually exist?
By the mid-1990s America's economy was visibly expanding. The 1991-92 slowdown was over, replaced by boom times. The American economic machine was doing what it does best. American workers were producing high quality, high value goods and services. Those products were being distributed across the country and into all parts of the world. Money was pouring in at an unprecedented rate. Everyone who wanted a job had one. In some cities, the shortage of labor got so bad that there was a bidding war to attract hourly workers to fast food restaurants.
After the 1996 election when things should have normally slowed down, something unexpected happened. The Asian economy crashed and burned. The American public saw a few TV news stories about failing businesses in various Asian countries. They also saw dispossessed workers selling trinkets on the streets in an effort to feed their families. What everyone here in the U.S. experienced were falling gasoline prices and rock bottom prices for electronic goods.
The other unexpected event was a flood of investment money moving from Asian markets into the American markets. As the money moved into our markets, stock prices went up. When stock prices went up, the value of individual American investor portfolios went up, creating a desire to buy more stock, pressing the price of the stock up even further. More foreign money came in, pushing prices even higher. As people saw the price of stocks continue to rise, they rushed to buy even more shares. Day-after-day people were "getting richer" as the value of what they owned went endlessly upward.
When reasonable people, people who knew better, spoke out about the expanding economic bubble, their advise went mostly unheeded. Some fund managers expressed their fiduciary responsibility by closing down the Fund they managed and sending the money plus profits back to the investors. Other managers were not so "pessimistic" and continued to earn big dollars by encouraging investors to "get in while the getting was good."
Even when the Chairman of the Federal Reserve Bank of the United States warned of "irrational exuberance", he was thought to be overly cautious. During the period of the Clinton impeachment, the business press reminded people of how well the economy was being managed and asked if the public really wished to tamper with success.
The Asian economy finally began to heal and Asian investors began to bring their money back home to reinvest in their own economies. The process of disinvestment in the American economy started a counter-cycle. As money came out of the markets, prices fell. As prices fell, American investors got nervous, felt poorer, causing them to pull their money from the market, causing further downward pressure on market prices. Fund managers had to clean up their funds before profits were reported. More stocks were dumped. Prices continued to fall.
When money is pouring in and people are getting rich, few investors are closely examining the books. If tricky accounting practices are being used, very few people complain. But, during the downward slide, when new money is not coming in to cover shortages, when profits are way down, companies must either tell the public they are in trouble, causing their stock price to decline, or they lie, they cover-up, and they cook the books, hoping an infusion of cash will save the day. This time no turnaround in the cash situation occurred. When their real financial situation was exposed, a few companies came crashing down.
The criminal behavior that brought down those few companies represented only a small fraction of the general revaluation of the American markets. Those tech investors who sold out in December 1999, and the NYSE investors who sold out in December 2000, captured their investment gains. The rest captured less and some who got in late showed losses. It is easy to blame others for the natural fluctuations of the markets. Politicians are doing just that. Beware of them.
In January 1996, the NYSE stood at about 5500. One year later, January 1997, it stood at about 6400. January 1998, approximately 7900. January 1999, approximately 9100. January 2000, approximately 11,000. January 2001, approximately 10,800.
October 9, 2002, the market closed at 7286.27 or back to where we were
in 1997 before the extra economic boost given our markets by the Asian
economic crises.
Lee A. Presser
Lee Presser is the Principal Partner of The Presser Group, a business and financial consulting firm. His commentary and analysis appears in various publications.
Contact Mr. Presser at lap51p@netscape.net
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