America was a speculative enterprise from the start. The early Puritan settlers had negative cashflow, as did many of the real-estate ventures, canal projects, wildcat banks and railway companies of the 19th century. The US Treasury was a defaulter on its gold obligations in 1933. The world stood aghast at the growth of federal debt during the Reagan era in the 1980s.
But there has never been anything like the so-called New Economy - not for excitement, not for bunkum, not for sheer centi-billion-dollar delusion.
What is meant by the New Economy? Broadly, the phrase connotes getting rich. It refers to the internet in general and to the newest and most conceptual branches of the information technology field in particular.
The purest examples of New Economy businesses are those that, while not actually generating a profit, command a mammoth stock market capitalisation. Pacific Century CyberWorks - which, at the ripe old age of 10 months, has just acquired Hong Kong Telecom - is a worthy example. Others include Akamai, Amazon.com, Ariba, Buy.com, Level 3 Communications, Priceline.com, Red Hat, VA Linux Systems and Verticalnet. The 10, a mere sample, have a combined combined stock market capitalisation of Dollars 176bn.
It is widely asserted that these prodigies of invention have ushered in a new age of abundance. By making information cheap and ubiquitous, the argument goes, they (and many others like them) have begun to impose the textbook ideal of perfect competition on a hitherto imperfect world. It is widely asserted and uncritically accepted that the growth of the New Economy has created vast, indeed almost unimagined, wealth.
The latter claim is possibly true. The New Economy has in fact created great fortunes. But the source of these riches is not the operating income of information technology businesses. Rather, it is the capitalisation of those businesses in the stock market. In no small part, the New Economy is a stock-market promotion.
You may ask: What about the science? What about the productivity? What about the information age? My reply is that the economic significance of the technology must be misunderstood or hugely overblown. If it were not, the market would be rewarding the shares of the companies that use it, not - as now, almost exclusively - the shares of the companies that create, promote and develop it.
Air-conditioning, one of the liberating technologies of the 20th century, has also created dynastic fortunes, but few belong to the air-conditioner manufacturers. The prime beneficiaries of the climate-control industry are the owners of real estate in the hot, hazy and humid regions of the world. The capitalised value of Orlando and Las Vegas would undoubtedly be smaller if the patrons of Walt Disney World and the Mirage hotel and casino had to cool themselves with electric fans and iced tea.
The speculation surrounding the New Economy is, in good measure, speculation for its own sake. It is increasingly disjointed and incoherent. Thus, late Thursday, Palm Inc, the maker of a kind of electronic Rolodex, was valued in the stock market at Dollars 53bn. Newly spun off from its parent 3Com, Palm in fact does produce trace amounts of net income: Dollars 22.5m in the six months ended November 26, on revenue of Dollars 435m.
Nonetheless, its claim to membership of the New Economy was, at least by the close of the stock market, uncontested, as its valuation was plainly unrelated to anything except the delirious mood of the stock market itself.
Tellingly, 3Com, which itself is a cog in the internet wheel and which happens to own 94 per cent of Palm, was capitalised at only Dollars 28bn at Thursday's close. That was Dollars 22bn less than the value of its Palm holdings. Like some ageing hippie, 3Com has woken to discover that others have decided it is old.
So it goes in the New Economy, where an established record of earning power is interpreted as a sign of a lack of imagination.
Countrywide Credit Industries, the premier independent US mortgage bank, is a leading financial beneficiary of the new technology. It is the highest-rated internet mortgage lender. Its IT capability enables it to initiate mortgage transactions with its coast-to-coast clientele at the appropriate level of interest rates. During the past decade, compound growth of its stockholders' equity has averaged about 35 per cent a year.
For these achievements, and more, it is rewarded with a stock price equivalent to little more than book value. Strive as it may, Countrywide will never gain entry into the semi-mystical order of the New Economy. As with the ineffable quality of cool, newness in the speculative context is something that you either have, or you don't.
Many do, enough to have lifted the Nasdaq Composite index into its own special orbit. Over the past 12 months, observes market analyst James A. Bianco, the Nasdaq has appreciated by Dollars 3,100bn whereas the total US stock-market capitalisation increased by only Dollars 2,500bn.
In other words, the overall value of American equities, minus the Nasdaq, actually fell on the order of Dollars 600bn. The New Economy (ie the Nasdaq) has become the one and only US stock-market wealth creator.
The fitting symbol of this innumerate mania is an eight-storey cylindrical sign that the parent company of the Nasdaq stock market erected in Times Square last year.
Rising 120ft, the structure dominates the Crossroads of the World, converting the famous intersection into (as one sign designer aptly put it) a "corporate theme park". Some theme.
James Grant is the editor of Grants Interest Rate Observer www.grantspub.com
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