It is generally not apparent at the time, but some years in retrospect get suffused with a golden nostalgia, as events take an unexpected and unpleasant turn afterwards that leaves them remembered as the “last good year.” In some cases, this nostalgia happens immediately, as a major war or a huge depression breaks out, cutting off the future from the past in people’s minds. In other cases, the change is subtler, or represents just the beginning of decline from a peak that in retrospect proves to be of long-term significance. In the troubled US economy of today, it is increasingly obvious that one recent year deserves to be bathed in such a roseate glow, of perfection never to again to be attained. That year is 1995.
Earlier in the twentieth century, 1914 and 1929 obviously in retrospect were bathed in a golden glow, as the last years before the Great War and the Great Depression retrospectively. 1955 too has a certain aura, as the peak year of the Eisenhower bull market, in which the CEO of General Motors was Time’s “Man of the Year.”
The next “last good year” 1973, was not all that attractive in itself. It included the collapse of an administration, as Richard Nixon went from triumphantly re-elected peacemaker to hounded clinger-to-office within the space of less than twelve months. Economically, October 1973 saw the first oil crisis, as the price of a staple of US life suddenly quadrupled. What had appeared to be a non-inflationary recovery from the 1969-70 downturn turned into an inflation-ridden nightmare, as the price controls of 1972 were removed and recession began to loom.
Yet for the millions in America’s blue collar workforce 1973, the end of the great post-war productivity surge, deserves to be remembered with the greatest affection – it was the last year before their living standards and employability began an inexorable decline that has lasted to this day. Since then university graduates have done quite well, and most bankers have made out like bandits. However the high-school graduates and even high school dropouts who before 1973 could count on the American dream of a house in the suburbs and gradually improving living standards at a level far above those enjoyed in any other country or at any other period of history, have found their employability eroded and their living standards decimated.
In a few years, notably the late 1990s, the rising tide has lifted all boats. Yet most of the time even generally improving living standards have brought little to blue-collar lunch pails, and in times of turmoil such as 1980-82 and the last couple of years the effect on the lower-skilled has been truly devastating. Long-term unemployment soared last month to levels never seen since the BLS series started in 1948, and by and large those poor guys aren’t MIT graduates.
Nevertheless, for the current generation, 1973 is becoming a bit remote as a lost Nirvana – after all, anybody now under 40 has only read about it in textbooks. So we need a new year to hark back to economically as an example of youthful perfection to which we all long to return. I suggest that 1995 is well qualified to fill that role (well in my case, that year was neither youthful nor perfect – I was 45 and going through one of my recurring periods of financial stringency – but you get the point.)
For the US economy as a whole, 1995 was not a perfect year. Wall Street had already begun its metamorphosis into a rent-seeking trading behemoth – the derivatives scandals of Proctor and Gamble, Gibson Greetings, Orange County and the collapse of the London merchant bank Barings all happened in a 12-month period in 1994-95. Culturally we were also well down the road to perdition – 1995 was the year of the OJ trial.
1995 was also the beginning of three changes in government, of which one petered out in disappointment, a second has continued modestly useful and the third haunts us to this day. The first was the new Republican Congress, the first in over 40 years, inaugurated on January 4 under the leadership of House Speaker Newt Gingrich. It appeared at the time that this would genuinely reform many of the economically dysfunctional features of US politics, including notably giving the President a line-item veto, thus slowing the growth of the economic deadweight of pork-barrel spending. In the event, the promised reforms were derailed or were never even attempted, with the exception of the moderately helpful 1996 welfare reform legislation. Even the hopelessly damaging farm subsidies, reduced in 1996, were to be restored in 2002. The promised movement to a freer US market, back towards a Calvin Coolidge economy, simply never took place.
The second change was the inauguration on January 1 of the World Trade Organization. This is about the only international body that is on balance genuinely helpful to the global economy. It acts as a witches’ chorus against protectionism, taking advantage of fleeting moments of support for free trade to push forward a barrier-lowering agenda that has produced much of the genuine increase in prosperity that most of the world has enjoyed since 1995. It also whacks US governments around the head with a 2×4 when they indulge in genuinely silly protectionism like the anti-dumping action against Chinese tires.
The third, as readers of this column will be only too painfully aware, was the change in monetary policy announced by Alan Greenspan elliptically to the Senate Finance Committee on February 23 of that year. Since that date, M3 money supply has increased by about two thirds faster than nominal US Gross Domestic Product. We have had asset bubble after asset bubble, in stocks housing and commodities. We have also had a perpetual US payments deficit and greatly accelerated outsourcing to the Third World, as the natural US advantage in capital costs has been negated by all the silly money sloshing around the globe. The net effect of this change has been thoroughly destructive to US industry, financial markets and living standards, and it’s getting worse.
The first stage of the first great asset bubble happened in 1995. In that year the Standard and Poor’s 500 share index rose by 34.1%, breaking decisively above the gradually rising trend of the previous decade and soaring into the stratosphere. By December 1996 Fed Chairman Alan Greenspan was babbling about “irrational exuberance” – and he was at least six months late in noticing it.
Nevertheless the 1995 phase of that bull market took place before the Fed’s funny money policies had time to take effect. Its cause was not cheap money in itself, but an astonishing burgeoning of the technological possibilities of the US economy – yes, and the world economy, but the nexus of the revolution was in the United States.
By far the best publicized technological advance of 1995 was the advent of Microsoft’s Windows 95 operating system on August 24; this was to become the best selling operating system of all time and drive competitors out of business. A little-known additional feature, included as an optional extra initially but as standard from November, was Microsoft’s first Web browser Internet Explorer.
The World Wide Web had been invented in 1992, the Mosaic web browser had been introduced in 1993 (it was succeeded as market leader by Netscape Navigator the following year) and Amazon.com was founded in 1994. However the explosive growth of the Internet was centered on 1995. Traffic on Internet backbones had been roughly doubling each year, reaching 16.3 terabytes/month in December 1994. Then over the next two years usage exploded, reaching 1500 terabytes/month in December 1996, thus multiplying almost 10-fold in each of 1995 and 1996 (growth slowed again to a mere doubling in 1997.) The number of websites in existence rose from 10,022 in December 1994 to 100,000 in December 1995, that 1,000% growth slowing to a mere 650% in 1996.
There were estimated to be 30 million Internet users by the end of 1995; the number of Online Service Provider subscribers (AOL and the like) doubled during the year from 5.8 million to 11.5 million, but only during 1995 did a substantial percentage of OSP subscribers (20% by year-end) start using the OSP to reach the Internet, as distinct from merely sending e-mail.
Of the Internet services we use today, Yahoo was founded in March and e-Bay in September (admittedly Google didn’t start till 1998.) What’s more the first great Internet fortune was made with the Netscape IPO, which took place on August 9, soaring from $28 to $75 per share on the first day of trading.
Oh, and the DVD was launched in September.
In summary, 1995 was not only a year of rare political promise, it was also the central year of by far the greatest technological innovation of its generation, an innovation that is still changing the world year by year. That innovation was mostly generated within the United States, and its initial gigantic surge of wealth creation was overwhelmingly dominated by US companies and entrepreneurs. In 1995, it was still possible to believe that not only was the United States the leading world economy, but that it would go on being so far into the future. Indeed, that belief seemed more rational in 1995 than it had a decade earlier, as in the intervening decade communism had died and Japan had slumped into its never-ending recession.
Even more than was nostalgia for 1914, 1929 and 1973, nostalgia for 1995 is for Americans entirely rational. It’s even intellectually productive – by seeing what changed around that time we can identify the tendencies that need to be reversed in order for that lost Nirvana to be – at least partially – regained. With the right policies, we can hope that in some future year we will stand at the cusp of another great technological leap forward – with Americans leading the way.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)