Ed. Note: This article was written prior to the tragic events on September 11, 2001.
During the 17th-century rare tulip bulbs could cost as much as a house at the tail end of the speculative bubble. Does this sound vaguely reminiscent of our recent dot com bubble? Was it any surprise that this dot com bubble burst? Still, it is heartening to find that the market for tulips is thriving four centuries later. In fact, the tulip craze played out smack in the middle of the Netherlands economic Golden Age, a time when the country became the richest in Europe (Fortune, 6/11/01). This bodes well both for the overall economy and the dot com industry itself.
The recent burst of the dot com bubble and the subsequent economic slowdown will not end in dismal disaster, but rather regenerate economic growth. As with the recession of 1990-91 people who lost jobs started up new companies or joined emerging companies fueling the recent 10-year expansion.
A burst bubble acts much like a forest fire that burns the dead wood enabling that the new life at the forest floor to flourish. Many who have lost jobs during 2000 and 2001 will benefit from the knowledge gained during the last growth cycle. Ideas will be refined and sustainable business models will emerge.
In order to help spur growth, the Federal Reserve lowered interest rates substantially during the first half of 2001. The impact of this action usually takes effect in six to twelve months. In addition to lower interest rates consumers started receiving tax cut checks in July; a 1% reduction in the tax rate for many tax brackets should help even more.
Both of these governmental actions will stimulate future economic growth. In addition, commodity prices have decreased reflecting lower worldwide demand. Energy prices, one of the key reasons for raising interest rates in 2000, have now decreased. Inventory reduction shows that as the economic stimuli growth filters through the economy many manufacturing companies will be well positioned for growth.
Some industries will not feel this upward trend due to the overcapacity developed during the end of the last business cycle. These industries include: semiconductor, telecommunications and computer related businesses. These industries will stall until the other industries regain confidence and start making capital equipment purchases.
In order to take advantage of this upturn your team must evaluate the market segments that will move quickly versus those that will continue to stagnate until further stimulus returns them to growth.
The Japanese economy is a stark contrast to the US economy. In the US when the economic bubble of the new economy burst, companies went bankrupt; people became unemployed, causing an economic slow-down. This economic slow-down felt like a recession in comparison to the rapid growth of the 1990s. It took a year to digest the consequences of our unhealthy speculative diet. Japan did not take its medicine when its speculative bubble burst, and as pointed out in previous articles it propped up inefficient conglomerates. Giant companies stayed on expensive life support systems draining investment capital away from emerging and efficient companies causing a prolonged recession.
Now there is a bright spot, Japans new prime minister Junichiro Koizami is ready to take the companies off life support, by cleaning up bad debt within the banking system which will result in bankruptcies and unemployment. This medicine comes at a difficult time for the global economy. With the US only beginning to enter its recovery phase, global partners will not be able to depend on Japan, the worlds second largest economy to help pull the rest of the world out of its slump. Long term, however, this medicine will lead to the long awaited recuperation and allow Japan to grow in a healthy economic environment.
Europe was to be the bright spot in 2001. While unemployment is down year over year, economic sentiment is also down and consumer spending is beginning to falter. The impact of the US slow down brought about a significant negative influence on the European economy.