Wednesday » June 12 » 2002

Rational pessimism
Just as markets were accused of 'irrational exuberance' a few years ago, now
they're being accused of 'irrational pessimism.' But in both cases, the
market's sentiments entail realism, and are entirely justified
 Richard Salsman
 National Post

Tuesday, June 11, 2002

When North American stock markets raced upward from 1995 to 1999, their rise was ridiculed -- by
people like Yale's Robert Shiller and the U.S. Federal Reserve's Alan Greenspan -- as a mere "irrational
exuberance." No facts, they said, explained the gains. The rise, they claimed, was just another case of
"market failure" which needed to be "fixed" -- by interest rate hikes, re-regulation and some
trust-busting -- by whatever means necessary to push the market back down where it "belonged."

Yet the gains of 1995-1999 were r ationally based on facts. In his January, 1995, State of the Union
address, president Clinton declared "the era of big government is over." Republicans had just taken
full control of Congress, for the first time in a half-century. In early 1995, the U.S. Fed stopped raising
interest rates; it remained relatively inactive until 1999. From May, 1995, to summer, 1998, the
treasury maintained a strong dollar policy, lowering inflation expectations. In 1996, welfare was
reformed, diminishing parasitical behaviour. In the same year the telecom industry was partially
deregulated. A year later the capital gains tax rate was cut, further raising incentives to invest. Much
of today's Internet capacity was built in these five years, during which corporate profits and stock
prices grew at a 20% annualized rate. The unemployment rate fell by half, to a 30-year low of 3.9%.

These are the facts. Did they generate positive emotions? Sure. Why wouldn't they? Muslim zealots
aside, isn't this how most people wish to live, working and prospering amid peace? Was it "irrational
exuberance?" Not unless one believes -- as some professors and central bankers do -- that prosperity
is irrational and unsustainable. That view usually stems from a deeper one, a view that prosperity is
evil. Hatred and envy motivated all the harangues we once heard about the "decade of greed."

Of course, the "the era of big government" wasn't really over for good. Government certainly didn't
shrink in the late 1990s -- anywhere in the world. It was just in partial remission, like a cancer that
stops advancing only briefly, permitting the victim a few, good, final days -- before killing him. We didn't
get laissez-faire capitalism in the 1990s, as we should have. The world was still subject to central
banking, income taxes, trustbusters and the government's terrorism-appeasers.

And they got back to work again, at the end of the millennium. They acted fully on that hatred and
envy. From 1999 to 2000, they raised interest rates. In the spring of 2000, they abrogated biotech
patents -- and intensified their trust-busting of Microsoft. In the fall of 2000, they spent weeks trying
to steal a president election. Imposing energy price controls, by 2001 they had blacked-out large parts
of California -- while bankrupting firms like Enron. They abandoned the strong-dollar policy. And they
flirted with protectionism, by imposing tariffs on imported steel and softwood lumber. And this caused
a recent 50% plunge in U.S. profits -- the worst plunge since the Great Depression.

Government officials spent more time and money on wealth-crushing policies than they did on their
only proper job: defending innocents from attack by savages, at home or abroad. And so they allowed
the murder of thousands of innocents. The stood by, permitting the obliteration of the World Trade
Center (an act that was first attempted in 1993) and part of the Pentagon. They failed to stop anthrax
attacks. Yet after they failed -- even though they failed -- their approval ratings rose. New York City's
mayor was hailed as a demigod. The President's popularity skyrocketed. So they sought more power
and funding. All the while, the media welcomed and hailed the return of big government.

Now, as the U.S. stock market heads into a potential third year of decline and stagnation -- as
bankruptcies and joblessness mount, and as the dollar plunges and the gold price soars --
market-makers are told that further terrorists attacks, this time perhaps nuclear-based, are
"inevitable." And who's saying it? Those whose job it is to make sure it never happens: so-called
leaders -- like Dick Cheney, the U.S. Vice-President; Bob Mueller, the FBI director; and Tom Ridge, the
U.S. Homeland Security chief.

Why can't these leaders ensure that no further attacks will occur? Because they know they're not
really pursuing the likely perpetrators, including the terror-sponsoring regimes. They're befogged in a
"bunker mentality," a "prepare-for-attack" mode. Most other world leaders do the same. Why?

Because official U.S. policy -- best reflected by Colin Powell, the U.S. Secretary of State -- has not been
able to kill terrorists and end regimes sponsoring them, but instead has 1) allied with dictatorships
(Pakistan), 2) allowed terrorists (the Taliban and al-Qaeda) to escape there, 3) emboldened Pakistan
to attack a real U.S. ally (India), 4) revived trade with an existing terror state (Cuba), 5) sponsored
another terror state (for Yasser Arafat), 6) built two nuclear plants for "axis of evil" member North
Korea (while prohibiting such construction in the United States) and 7) condemned, repeatedly, the
only state today that's trying to fight terrorism (Israel).

These are policies not of strength and peace, but of appeasement and national suicide. And these are
the facts. Are they generating negative emotions? Of course they are. Why wouldn't they? Muslim
zealots aside, isn't this the chaos and poverty most people wish to avoid? How can anyone wonder
why markets stagnate -- or blame it, naively, on "irrational pessimism?" The pessimism is justified by
the facts. And the facts today are grim for any freedom-loving, terror-hating citizen of the world.

For the past few years, the U.S. government has been intervening and crushing ethical activity which
should be left free (business), while leaving free -- and actively promoting -- evil activity that should be
exterminated (terrorism). The era of big government is back. As such, more innocents will suffer.

                            © Copyright 2002 National Post

Richard Salsman is president and chief market strategist for International Forecasting, Inc.,
based in Cambridge, Massachusetts.