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NASDAQ 11,743?

Summary:
No, NASDAQ has not reached 11,743; it’s around 8950 as I write this post. I’m going to make a slightly different argument. I’m going to argue that 11,743 is where NASDAQ would be if NGDP had grown as expected after the spring of 2000. Between the spring of 1990 and the spring of 2000, NGDP grew at a 5.57% rate. That seems like a reasonable forecast of the growth rate over the following few decades, given what investors knew at the time, as I am comparing similar points in the business cycle. In that case, as of the spring of 2000, investors probably expected NGDP to be around ,001b by the spring of 2019. The actual value was ,341b. Let’s assume that money is neutral in the long run, and that the ratio of NASDAQ/NGDP is not impacted by monetary policy in the long run.

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No, NASDAQ has not reached 11,743; it’s around 8950 as I write this post. I’m going to make a slightly different argument. I’m going to argue that 11,743 is where NASDAQ would be if NGDP had grown as expected after the spring of 2000.

Between the spring of 1990 and the spring of 2000, NGDP grew at a 5.57% rate. That seems like a reasonable forecast of the growth rate over the following few decades, given what investors knew at the time, as I am comparing similar points in the business cycle.

In that case, as of the spring of 2000, investors probably expected NGDP to be around $28,001b by the spring of 2019. The actual value was $21,341b.

Let’s assume that money is neutral in the long run, and that the ratio of NASDAQ/NGDP is not impacted by monetary policy in the long run. In that case, NASDAQ would have now been at 11,743. If money is not neutral, and a more expansionary monetary policy leads to a higher NASDAQ/NGDP ratio (by boosting RGDP growth), then NASDAQ would have been even higher than 11,743.

Of course investors did not accurately forecast the slowdown in NGDP growth, and hence bonds would have been a much better investment in 2000, in retrospect. And even the NASDAQ/NGDP forecast was probably a bit optimistic at the very peak (when NASDAQ briefly exceeded 5000). But it’s not surprising that when one looks back over a period of several decades, the very peak price will have been, in retrospect, too high. That’s the nature of efficient markets. The very peak Bitcoin price also looks too high today, but no one at the time knew where the peak would be.

The overall tech bubble was actually not all that irrational, as we now know that fairly high tech stock prices were quite justified in the late 1990s, especially conditional on rational NGDP growth forecasts. Of course we didn’t know which specific tech stocks would become trillion dollar companies, which is the nature of efficient markets.

PS.  A quick reply to Tyler Cowen:

1. I do not believe that national security was an important motivation for Trump in the trade deal.

2. I do believe that national security was an important motivation for many people in the US government, as Tyler says.

3.  I do not believe the trade deal improved US national security.  Indeed I believe the opposite is true, as the trade war is part of the US government effort to create a new cold war, which I see as reducing US national security.

4.  I do believe that China spies on the US, and tries to steal technology that would improve its military capability.  (Other countries also do this.)  I believe we should try to prevent this from occurring, but I don’t believe that this spying has a material impact on US national security.

5.  I believe that a richer China would improve US national security.

6.  I believe that Russia is by far the greatest threat to US national security, with North Korea a distant second.

To conclude, I believe it makes more sense to interpret the trade deal as an exercise in mercantilism, and judge it on that basis.  If you are worried about the trade deficit (I am not), then Trump’s policies have been a complete disaster.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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