A History of Stock Market Bottoms

Recent market turmoil has many wondering when the freefall will cease, and whether we are on the brink of a new Great Depression, which is supposed to happen every 70-80 years according to Kondratieff Wave theory.  I don't believe we are on the brink of a depression, even though the present recession is already in its 10th month.  But it would be instructive to compare the current situation with prior market corrections, and judge the present situation in a historical context. 

We can first start with a chart of the S&P500, from 1950 to today.  We can see that the deepest deviations from the trendline appear to be in 1950, 1970, 1974, 1982, 1987, 1990, and 2002.  We shall term these instances as historical 'bottoms' for the stock market.  All but the 1987 bottom were in the midst of economic recessions. 

S&P500  

From this chart, we can see that the time period between bottoms can be irregular, with over a decade passing between them, in some cases.  1974 and 1982 appear to be the deepest corrections.  These bottoms coincide with recessions, but interestingly do not coincide with other major crises.  The Cuban Missile Crisis, Kennedy assassination, and 9/11/01 did not induce major market crashes beyond the first few days.  Now, we can take the datapoints of each of these bottoms, and chart the exponential trendline that connects them.  This is purely a chart of index valuation, with dividends not included. 

Bottoms 

From this chart. we can see that the equivalent value of the S&P500 in 2008, as designated by the red circle, would be around the 1000 level.  As of October 10, 2008, the S&P500 is at 899, or 10% below the level of the bottoms trendline.  However, we can see that both the 1974 and 1982 bottoms are substantially below the trendline. 

The S&P500, since 1950, has delivered an 11.4% average return, with 7.7% of that in the form of a rise in the index itself, and 3.7% of the return being in the form of dividends.  If the long-term underlying growth rate of the index is 7.7%, we can chart a 7.7% compounded projection trend from each of these bottoms as another method to compare them to an approximate 2008 equivalent.  We shall start this chart from 1970. 

7projS&P500

It is apparent that 4 of the 6 bottoms cluster around a 2008 projection of 1100-1200, but the two deepest bottoms of 1974 and 1982 project to a 2008 equivalent of only 700-750.  These should be considered the two 'mega-bottoms' that happen a couple times per half-century, with the other 4 being only smaller bottoms that happen every 7-10 years, whenever there is a recession. 

Since we are presently at 900 for the S&P500, we are about half-way between a smaller bottom and a mega-bottom.  Therefore, do not be surprised if the S&P500 does, in fact, dip into the low 700s in 2008 (or high 700s in 2009), merely to match this correction to 1974/1982 levels.  This would be a further 20% correction from the 900 close of October 10, 2008.  It may not happen, but it certainly could in terms of historical precedent.  This also means that the Dow Jones Industrial Average would simultaneously decline to as low as 6500.  Indeed, there is no guarantee that it could not go even lower, but that would he historically unprecedented.  Even the 1932 bottom in the Great Depression was not deeper than the 1974 and 1982 bottoms, by these measures.       

The Good News :

If the thought of a further 20% decline in the S&P500 or DJIA is depressing, also consider the following :

1) After both the 1974 and 1982 mega-bottoms, the stock market promptly returned at least 60% in the next 9 months.  This also happened after the 1932 bottom within the Great Depression. 

2) Never forget about dividend reinvestment.  Dividend yields are highest when the stock market is at the depths of a bottom, and reinvestment ensures that new shares are purchased at the lower prices.  This enables the investor to enhance his returns when the recovery finally commences.  Even in the 1970s, the major indices were stuck within a flat range for a decade, but dividend yields as high as 5% enabled total returns that were substantially better. 

Considering points 1) and 2), make sure that you are in a position to capture the recovery, and are not forced to sell at the unfavorable prices of the bottom.  This means that you must a) never hold any substantial margin debt, b) be positioned across a diversifed set of securities, preferably ETFs ahead of individual stocks, and c) watch as little financial news as possible, thereby reducing your chances of panic that could lead you to take ill-considered actions.   

Tremendous profits will be made by those who can steel themselves through this purging of the weak, and are subsequently prepared for the post-bottom recovery.  Put daily volatility aside, and enjoy the historical times that we are experiencing first-hand. 

Related :

Economic Growth is Exponential and Accelerating

The Housing Bubble - 20-year Gains May Never be Repeated

(crossposted on TechSector)

A Future Timeline for Economics

The accelerating rate of change in many fields of technology all manifest themselves in terms of human development, some of which can be accurately tracked within economic data.  Contrary to what the media may peddle and despite periodic setbacks, average human prosperity is rising at a rate faster than any other time in human history.  I have described this in great detail in prior articles, and I continue to be amazed at how little attention is devoted to the important subject of accelerating economic growth, even by other futurists.

The time has thus come for making specific predictions about the details of future economic advancement.  I hereby present a speculative future timeline of economic events and milestones, which is a sibling article to Economic Growth is Exponential and Accelerating, v2.0

2008-09 : A severe US recession and global slowdown still results in global economic growth falling no lower than 3% a year.  Negative growth for world GDP, which has not happened since 1973, is not a serious possibility, even though the US and Europe experience almost no GDP growth during this period.  The world GDP growth rate trendline resides at growth of 4.5% a year.

2010 : World GDP growth rebounds strongly to 5% a year, despite high oil prices.  More than 3 billion people now live in emerging economies growing at over 6% a year.  More than 80 countries, including China, have achieved a Human Development Index of 0.800 or higher, classifying them as developed countries. 

2011 : Over 2 billion people have access to unlimited broadband Internet service at speeds greater than 1 mbps, a majority of them receiving it through their wireless phone/handheld device. 

2013 : Many single-family homes in the US, particularly in California, are still priced below the levels they reached at the peak in 2006, as predicted in early 2006 on The Futurist.  If one adjusts for cost of capital over this period, many California homes have corrected their valuations by as much as 50%. 

2014 : The positive deflationary economic forces introduced by the Impact of Computing are now large and pervasive enough to generate mainstream attention.  The semiconductor and storage industries combined exceed $800 Billion in size, up from $450 Billion in 2008.  The typical US household is now spending $2500 a year on semiconductors, storage, and other items with rapidly deflating prices per fixed performance.  Of course, the items puchased for $2500 in 2014 can be purchased for $1600 in 2015, $1000 in 2016, $600 in 2017, etc. 

2015 : As predicted in early 2006 on The Futurist, a 4-door sedan with a 240 hp engine, yet costing only 5 cents/mile to operate (the equivalent of 60 mpg of gasoline), is widely available for $35,000 (which is within the middle-class price band by 2015). This is the result of combined advances in energy, lighter nanomaterials, and computerized systems.

2016 : The Dow Jones Industrial Average surpasses 25,000.  The Nasdaq exceeds 5000, finally surpassing the record set 16 years prior in early 2000. 

2017 : Medical Tourism introduces $200B/year of net deflationary benefit to healthcare costs in the US economy.  Healthcare inflation is halted, except for the most advanced technologies for life extension. 

2018 : Among new cars sold, gasoline-only vehicles are now a minority.  Millions of vehicles are electrically charged through solar panels on a daily basis, relieving those consumers of a fuel expenditure that was as high as $3000 a year in 2008.  Some electrical vehicles cost as little as 1 cent/mile to operate. 

2020 : World GDP per capita surpasses $15,000 in 2008 dollars (up from $8000 in 2008).  Over 100 of the world's nations have achieved a Human Development Index of 0.800 or higher, with the only major concentrations of poverty being in Africa and South Asia.  The basic necessities of food, clothing, literacy, electricity, and shelter are available to over 90% of the human race. 

Trade between India and the US touches $400 Billion a year, up from only $32 Billion in 2006. 

2022 : Several millon people worldwide are each earning over $50,000 a year through web-based activities.  These activities include blogging, barter trading, video production, web-based retail ventures, and economic activites within virtual worlds.  Some of these people are under the age of 16.  Headlines will be made when a child known to be perpetually glued to his video game one day surprises his parents by disclosing that he has accumulated a legitimate fortune of $1 million. 

2024 : The typical US household is now spending over $5000 a year on products and services that are affected by the Impact of Computing, where value received per dollar spent rises dramatically each year.  These include electronic, biotechnology, software, and nanotechnology products.  Even cars are sometimes 'upgraded' in a PC-like manner in order to receive better technology, long before they experience mechanical failure.  Of course, the products and services purchased for this $5000 in 2024 can be obtained for $3200 in 2025, $2000 in 2026, $1300 in 2027, etc. 

2027 : 90% of humans are now living in nations with a UN Human Development Index greater than 0.800 (the 2008 definition of a 'developed country', approximately that of the US in 1960).  Many Asian nations have achieved per capita income parity with Europe.  Only Africa contains a major concentration of poverty. 

2030 : The United States still has the largest nominal GDP among the world's nations, in excess of $50 Trillion in 2030 dollars.  China's economy is a close second to the US in size.  No other country surpasses even half the size of either of the two twin giants. 

The world GDP growth rate trendline has now surpassed 5% a year.  As the per capita gap has reduced from what it was in 2000, the US now grows at 4% a year, while China grows at 6% a year. 

10,000 billionaires now exist worldwide, causing the term to lose some exclusivity. 

2032 : At least 2 TeraWatts of photovoltaic capacity is in operation worldwide, generating 8% of all energy consumed by society. 

2034 : The typical US household is now spending over $10,000 a year on products and services that are affected by the Impact of Computing.  These include electronic, biotech, software, and nanotechnology products.  Of course, the products and services purchased for this $10,000 in 2034 can be obtained for $6400 in 2035, $4000 in 2036, $2500 in 2037, etc. 

2040 : Rapidly accelerating GDP growth is creating astonishing abundance that was unimaginable at the start of the 21st century.  Inequality continues to be high, but this is balanced by the fact that many individual fortunes are created in extremely short times.  The basic tools to produce wealth are available to at least 80% of all humans. 

Greatly increased lifespans are distorting economics, mostly for the better, as active careers last well past the age of 80. 

Tourism into space is affordable for upper middle class people, and is widely undertaken. 

________________________________________________________

I believe that this timeline represents a median forecast for economic growth from many major sources, and will be perceived as too optimistic or too pessimistic by an equal number of readers.  Let's see how closely reality tracks this timeline.

Why the US Will Still be the Only Superpower in 2030, v2.0

125pxflag_of_the_people27s_republic_of_c_2One of the most popular dinner party conversation topics is the possibility that the United States will be joined or even surpassed as a superpower by another nation, such as China.  Let us assess the what makes a superpower, and what it would take for China to match the US on each pillar of superpowerdom.  Two years ago, in May 2006, I wrote the first version of this article, and it became the most heavily viewed article ever written on The Futurist.  The comments section brought a wide spectrum of critiques of various points in the article, which led me to do further research, which in turn strengthened the case in some areas while weakening it others.  Thus, it is time for a tune-up on the article. 

A genuine superpower does not merely have military and political influence, but also must be at the top of the economic, scientific, and cultural pyramids.  Thus, the Soviet Union was only a partial superpower, and the most recent genuine superpower before the United States was the British Empire.  Many Europeans like to point out that the EU has a larger economy than the US, but the EU is a collection of 27 countries that does not share a common leader, a common military, a uniform foreign policy, or even a common currency.  The EU simply is not a country, any more than the US + Canada comprise a single country. 

The only realistic candidate for joining the US in superpower status by 2030 is China.  China has a population over 4 times the size of the US, has the fastest growing economy of any large country, and is mastering sophisticated technologies.  But to match the US by 2030, China would have to : 

300pxnasdaq_times_square_display 1) Have an economy that matches the US economy in size.  If the US grows by 3% a year for the next 22 years, it will be $30 trillion in 2008 dollars by then.  Note that this is a modest assumption for the US, given the accelerating nature of economic growth, but also note that world GDP presently grows at a trend of 4.5% a year, and this might at most be 6% a year by 2030.  China, with an economy of $3.2 trillion in nominal (not PPP) terms, would have to grow at 11% a year for the next 22 years straight to achieve the same size, which is already faster than its current 9-10% rate, if even that can be sustained for so long (no country, let alone a large one, has grown at more than 8% over such a long period).  In other words, the progress that the US economy would make from 1945 to 2030 (85 years) would have to be achieved by China in just the 22 years from 2008 to 2030.  Even then, this is just the total GDP, not per capita GDP, which would still be merely a fourth of America's. 

Ww_gdp_per_capita The subject of PPP GDP arises in such discussions, where China's economy is measured to a larger number.  However, this metric is inaccurate, as international trade is conducted in nominal, not PPP terms.  PPP is useful for measuring per capita prosperity, where bag of rice in China costs less than in the US.  But it tells us nothing of the size of the total economy, which could be more accurately measured in commodities like oil or gold.  Nonetheless, in per capita GDP, the US surpasses any other country that has more than 10 million people (and is thus too large to rely solely on being a tax haven or tourist destination for GDP generation).  From the GDP per capita chart, we can see that many countries catch up to the US, but none really can equal, let alone surpass, the US.  An EU study recently estimated that the EU is 22 years behind the US in economic development.  The European Chamber of Commerce estimated that the gap between the EU and US was widening further, and that it would take 75 years for the EU to catch up to the US.  Again, these are official EU studies, and are thus not 'rigged by America'.         

220px-Percentage_of_global_currency The weak dollar leads some who suddenly fancy themselves as currency experts to believe/hope that the US will lose economic dominance.  However, we see from this chart that the US dollar comprises a dominant 65% of global currency reserves (an even greater share than it commanded in 1995), while the second highest share is that of the Euro (itself the combined currency of 21 separate countries) at just 25%.  Furthermore, the Euro is not rising as a percentage of total reserves, despite the EU and Eurozone adding many new member nations after 2001.  Which currency has any chance of overtaking the US, particularly a currency that is associated with a single sovereign nation?  The Chinese Yuan represents under 2% of world reserves, and China itself stockpiles US dollars.  Clearly, US dominance in this metric is enormous, and is not dwindling in the forseeable future. 

Valiantshield06 2) Have a military capable of waging wars anywhere in the globe (even if it does not actually wage any).  Part of the opposition that anti-Americans have to the US wars in Afghanistan and Iraq is the envy arising from the US being the only country with the means to invade multiple medium-sized countries in other continents and still sustain very few casualties.  No other country currently is even near having the ability to project military power with such force and range, despite military spending being only 3% of US GDP - a lower proportion than many other countries.  Mere nuclear weapons are no substitute for this.  The inability of the rest of the world to do anything to halt genocide in Darfur or other atrocities in Burma or Zimbabwe is evidence of how such problems can only get addressed if and when America addresses them.

150pxcocacola3) Create original consumer brands that are household names everywhere in the world (including in America), such as Coca-Cola, Nike, McDonalds, Citigroup, Xerox, Microsoft, or Google.  Europe and Japan have created a few brands in a few select industries, but China currently has almost none.  Observing how many American brand logos have populated billboards and sporting events in developing nations over just the last 15 years, one might argue that US cultural and economic dominance has even increased by this measure.

Cardseal1_14) Have major universities that are household names, that many of the worlds top students aspire to attend.  17 of the world's top 20 universities are in the US.  Until top students in Europe, India, and even the US are filling out an application for a Chinese university alongside those of Harvard, Stanford, MIT, or Cambridge, China is not going to match the US in the knowledge economy.  This also represents the obstacles China has to overcome to successfully conduct impactful scientific research. 

R&D 5) Become the center of gravity for all types of scientific research.  The US conducted 32% of all research expenditures in 2007, which was twice as much as China, and more than the 27 combined countries of the EU.  But it is not just in the laboratory where the US is dominant, but in the process to deliver innovations from the laboratory to the global marketplace.  To displace the US, China would have to become the nation that produces the new inventions and corporations that are adopted by the mass market into their daily lives.  From the telephone and airplane over a century ago, America has been the engine of almost all technological progress.  Despite the fears of innovation going overseas, the big new technologies and influential applications continue to emerge from companies headquartered in the United States.  Just in the Goog last four years, Google emerged as the next super-lucrative company (before eBay and Yahoo slightly earlier), and the American-dominated 'blogosphere' emerged as a powerful force of information and media.  Even after google, a new batch of technology companies, this time in alternative energy, have rapidly accumulated tens of billions of dollars in market value.  It is this dominance across the whole process of university excellence to scientific research to creating new companies to bring technologies to market that makes the US innovation engine virtually impossible for any country to surpass. 

Immigration 6) Attract the best and brightest to immigrate into China, where they can expect to live a good life in Chinese society.  The US effectively receives a 'education import' estimated to be above $200 billion a year, as people educated at the expense of another nation immigrate here and promptly participate in the workforce.  As smart as people within China are, unless they can attract non-Chinese talent that is otherwise migrating to the US, and even talented Americans, they will not have the same intellectual and psychological cross-pollination, and hence miss out on those economic benefits.  The small matter of people not wanting to move into a country that is not a democracy also has to be resolved.  The true measure of a country is the net difference between how many people seek to enter, and how many people seek to leave.  The US has a net inflow of immigrants (constrained by quotas and thus a small fraction of the unconstrained number of people who would like to enter), while China has a net outflow of native-born Chinese.  Click on the map to enlarge it, and see the immigration rate to America from the world (which itself is constrained by quotas in the US and forcible restrictions on fleeing the country in places like Cuba and North Korea. 

180pxnemotheatrical7) Be the leader in entertainment and culture, which is the true driver of societal psychology.  China's film industry greatly lags India's, let alone America's.  We hear about piracy of American music and films in China, which tells us exactly what the world order is.  When American teenagers are actively pirating music and movies made in China, only then will the US have been surpassed in this area.  Take a moment to think how distant this scenario is from current reality.  Which country can claim the title of #2 in entertainment and cultural influence?  That such a question cannot easily be answered itself shows how total US dominance in this dimension really is. 

Images_18) Be the nation that engineers many of the greatest moments of human accomplishment.  The USSR was ahead of the US in the space race at first, until President Kennedy decided in 1961 to put a man on the moon by 1969.  While this mission initially seemed to be unnecessary and expensive, the optimism and pride brought to anti-Communist people worldwide was so inspirational that it accelerated many other forms of technological progress and brought economic growth to free-market countries.  This eventually led to a global exodus from socialism altogether, as the pessimism necessary for socialism to exist became harder to enforce.  People from many nations still feel pride from humanity having set foot on the Moon, something which America made possible.

China currently has plans to put a man on the moon by 2024.  While being only the second country to achieve this would certainly be prestigious, it would still be 55 years after the United States achieved the same thing.  That is not quite the trajectory it would take to approach the superpowerdom of the US by 2030.  If China puts a man on Mars or has permanent Moon bases before the US, I may change my opinion on this point, but the odds of that happening are not high. 

9) Be the nation expected to thanklessly use its own resources to solve many of the world's problems.  It is certainly not a requirement for a superpower to be benevolent, but it does make the path to superpower ascension easier, as a malevolent superpower will receive even more opposition from the world than a benevolent one, which itself is already substantial.  If the US donates $15 billion in aid to Africa, the first reaction from critics is that the US did not donate enough.  On the other hand, few even consider asking China to donate aid to Africa.  After the 2004 Indian Ocean tsunami and the 2008 cyclone in Burma, the fashionable question was why the US did not donate even more and sooner, rather than why China did not donate more, despite being geographically much closer.  Ask yourself this - if an asteroid were on a collision course with the Earth, which country's technology and money would the world depend on to detect it, and then destroy or divert it?  Until China is relied upon to an equal degree, it is not in the same league. 

300pxtianasquare10) Adapt to the underappreciated burden of superpowerdom - the huge double standards that a benign superpower must withstand in that role.  America is still condemned for slavery that ended 140 years ago, even by nations that have done far worse things more recently than that.  America's success in bringing democracy to Afghanistan and Iraq, and defending local populations from terrorists, is condemned more than the UN's inaction in preventing genocide and slavery.  Is China prepared to apologize for Tianenmen Square, the genocide in Tibet, the 30 million who perished during the Great Leap Forward, and the suppression of news about SARS, every day for the next century?  Is China remotely prepared for being blamed for inaction towards genocide in Darfur while simultaneously being condemned for non-deadly prison abuse in a time of war against opponents who follow no rules of engagement?  The upcoming 2008 Olympics will be an event where political demonstrations are going to grab headlines perhaps to a greater degree than the sports themselves, and the Chinese leadership will be tested on how they deal with simmering domestic discontent under the scrutiny of the world media.  The amount of unfairness China would have to withstand to truly achieve political parity with America might be prohibitive given China's history over the last 60 years. 

Mn_chinaEconomically, is China prepared to withstand the pressures that the US presently bears?  How long before the environmental movement (at least the fraction of it that is actually concerned about the environment) recognizes that China is a bigger polluter of the atmosphere than the US is, and that the road to pollution reduction leads straight to China?  How long before China is pressured to donate aid to Africa in the manner that the US does?  What happens when poorer nations benefit from Chinese R&D expenditures, particularly if those are neighboring countries that China is not friendly with? 

Furthermore, China being held to the superpower standard would simultaneously reduce the burden that the US currently bears alone, allowing the US to operate with less opposition and more equitable treatment than it experiences today.  Is China prepared to take on the heat?  Arguably, there is evidence that the Chinese public has not even begun to think that far. 

125pxflag_of_the_united_statessvgOf the ten points above, Britain, France, Germany, and Japan have tried for decades, and have only achieved parity with the US on maybe two of these dimensions at most.  China will surpass European countries and Japan by 2030 by achieving perhaps two or possibly even three out of these ten points, but attaining all ten is something I am willing to confidently bet against.  The dream of anti-Americans who relish the prospect of any nation, even a non-democratic one, surpassing the US is still a very distant one. 

20070630issuecovUS400 A point that many bring up is that empires have always risen and fallen throughout history.  This is partly true, but note that the Roman Empire lasted for over 1000 years after its peak.  Also note that the British Empire never actually collapsed since Britain is still one of the most successful countries in the world today, and the English language is the most widely spoken in the world.  Britain was merely surpassed by its descendant, with whom it shares a symbiotic relationship.  The US can expect the same sort of very long tail if it is finally surpassed, at some point much later than 2030 and probably not before the Technological Singularity, estimated for around 2050, which would make the debate moot.   

That writing this article is even worthwhile is a tribute to how far China has come and how much it might achieve.  I would not bother to write such an article about, say, India or Germany (the largest of the 27 EU countries).  Nonetheless, there is no other country that will be a superpower on par with the US by 2030.  This is one of the safest predictions The Futurist can make. 

Related :

The Winds of War, the Sands of Time

Who Hates America?

Who Does America View Favorably?

The Age of Democracy

The Culture of Success

Why I Want Oil to Hit $120 per Barrel

Here on The Futurist, we have a long tradition of seeking permanent independence from oil-drunk dictatorships and theocracies, with the pursuit of long-term gains taking precendence over the avoidance of short-term pain.  I refer you to :

Why $70/barrel Oil is Good for America (February 1, 2006).

$70+/Barrel Oil, the Non-Crisis (April 25, 2006).

Terrorism, Oil, Globalization, and the Impact of Computing (August 22, 2006).

When oil first hit $70/barrel nearly two years ago, there were widespread fears of the US economy tipping into recession.  I pointed out that a much smaller piece of the US economy has exposure to oil than was the case in 1974 or 1981, which were the last times such high prices were seen (in inflation-adjusted terms).  Google, Oracle, and VMWare are far less vulnerable to oil prices than General Motors and Federal Express.  Sure enough, after 2 years of oil prices hovering around $70, the US economy has successfully adapted to it.  The specter of the $70 barrier is behind us, permanently.  This chart from the Bureau of Labor Statistics shows the annualized rate of oil price inflation over the last few years. 

Eiuir_132089_1191805717411_2

Notice how the rise from $20 to $80 led to import price inflation (the blue line) touching 10% for three years.  However, that rise is now behind us, with the settled price of $70/barrel or more no longer causing further inflation in the price of imported products.  0739_27busout Even more striking is the shrinkage in the US trade deficit.  Despite oil imports being as much as one third of the US trade deficit of about $60 Billion/month, the trade deficit has actually shrunk since the peak of 2006, contributing positively to GDP growth for the first time in over a decade (chart from BusinessWeek).  That the US economy can now take $70 and even $80 oil in stride is the biggest story that no one has noticed yet. 

However, $70 oil also fattens the coffers of the world's notorious 'Petrotyrants'.  From Iran to Venezuela to Saudi Arabia to Russia, one can note that there is a rather close corelation between an economy being heavily dependent on oil exports and the leaders of that country resisting or even rescinding democracy

Thomas Friedman has many interesting articles on the subject, such as his 'Fill 'Er Up With Dictators' :

But as oil has moved to $60 to $70 a barrel, it has fostered a counterwave — a wave of authoritarian leaders who are not only able to ensconce themselves in power because of huge oil profits but also to use their oil wealth to poison the global system — to get it to look the other way at genocide, or ignore an Iranian leader who says from one side of his mouth that the Holocaust is a myth and from the other that Iran would never dream of developing nuclear weapons, or to indulge a buffoon like Chávez, who uses Venezuela’s oil riches to try to sway democratic elections in Latin America and promote an economic populism that will eventually lead his country into a ditch.

But Mr. Friedman is a bit self-contradictory on which outcome he wants, as evidenced across his New York Times columns.

Over here, he says :

In short, the best tool we have for curbing Iran’s influence is not containment or engagement, but getting the price of oil down

And here, he says :

So here’s my prediction: You tell me the price of oil, and I’ll tell you what kind of Russia you’ll have. If the price stays at $60 a barrel, it’s going to be more like Venezuela, because its leaders will have plenty of money to indulge their worst instincts, with too few checks and balances. If the price falls to $30, it will be more like Norway. If the price falls to $15 a barrel, it could become more like America

Yet over here he says :

Either tax gasoline by another 50 cents to $1 a gallon at the pump, or set a $50 floor price per barrel of oil sold in America. Once energy entrepreneurs know they will never again be undercut by cheap oil, you’ll see an explosion of innovation in alternatives.

As well as over here :

And by not setting a hard floor price for oil to promote alternative energy, we are only helping to subsidize bad governance by Arab leaders toward their people and bad behavior by Americans toward the climate.

All of these articles were written within a 4-month period in early 2007.  Both philosophies are true by themselves, but they are mutually exclusive.  Mr. Friedman, what do you want?  Higher oil prices or lower oil prices?

But forget about Mr. Friedman wanting it both ways.  Instead, I am going to go with the second choice, that of higher oil prices.  I see this as a golden opportunity for permanent, far-reaching, multifaceted geopolitical change.  The US economy has successfully adapted to a permanent $70/barrel oil price with almost no real pain, and thus it is the time to take the bull by the horns, and lure the Petrotyrants into the ultimate irreversible trap. 

It is time to hope that the price of oil rises to $120/barrel by 2010, and stays above that level permanently. 

Why, you may ask?  Won't such a high price make Iran, Venezuela, Saudi Arabia, Russia, Nigeria, Sudan, Kazakhstan, and others even wealthier, without them having done anything to earn it?  Won't it make Sudan more genocidal, and Iran more able to equip terrorists?  Won't Saudi Arabia be able to fund even more Madrasas across the world? 

Sure it will, for a time.  But consider the perils of burning the candle at both ends.

But won't this also cause economic suffering in the US?  For a time, yes.  Gasoline will be at $5/gallon, and the trade deficit will temporarily widen.  I claim the possible recession will be brief, if there even is one at all, as the run-up from the present price of $80/barrel up to $120/barrel is already less of a shock than the jump from $20 to $80 that we already have successfully sustained.  I say all of this is worthwhile short-term pain, for when the quietly toiling engine of technological innovation emerges from its chrysalis, it will be gigantic. 

The technological climate of 2007 is very different from that of 1974 or 1981.  There is so much breadth and depth in energy innovation right now, even at the present $70-$80/barrel, that $120/barrel will move the technology and economics of alternative energy into fast-forward.  Currently, the petroleum market is shielded from exposure to both the electricity market and the agricultural market.  However, upcoming electric and plug-in hybrid automobile technologies consume electricity at an equivalent cost of just $1/gallon.  Furthermore, electricity can be generated from multiple sources that exist in almost every country, eliminating the weak position that oil importers are in relative to oil exporting nations.  With gasoline at $5/gallon, consumers will migrate towards hybrids, plug-in hybrids, and electric vehicles so rapidly that the auto manufacturers will start engaging in aggressive competition to lower prices and accelerate innovation.  This will greatly widen the fronts at which the oil market is exposed to the far cheaper and decentralized electricity market.  This spells trouble for oil producers who have to compete with electricity that is 3-5X cheaper in providing the same transportation. 

Simultaneously, cellulostic and algae-derived ethanol research efforts will get supercharged, greatly increasing the probability of a breakthrough that enables the attractive math of cellulose or algae to replace the unimpressive economics of corn ethanol.  If ethanol from switchgrass or algae is more compelling than oil at $120/barrel, oil has yet another enemy in addition to electricity.  The combination of electric vehicle and cellulose/algae ethanol technologies will act as a 1-2 punch to slash the consumption of oil across both the US and China permanently within just a few short years. 

Then, the fun begins.  The terrorists and despots who got lured into profligate spending under $120 oil will eventually find that the demand for their exports is plummeting.  Furthermore, the thing about subsidies such as those that Iran doles out is that they are self-propagating.  Note that in 2005, Iran exported $44 billion in oil, but spent $25 billion in subsidies, meaning that if oil fell to $30/barrel, Iran's export revenue would effectively become zero if the same level of subsidies are maintained.  34 cent/gallon gasoline leads to more car purchases and hence more demand for gasoline, increasing the cost of maintaining the subsidies, and hence the oil price floor at which Iran's export revenues would shrink to zero.  At $120/barrel, the subsidy obligation will be so burdensome that even a drop back down to $70/barrel would lead to a revenue falling behind expenses.  At the same time, China will have no choice but to aid in the hastening of these technological advances, as they will have to shift their priorities from locking up oil contracts to reducing the crushing cost of oil imports at $120/barrel. 

On the other hand, if oil stays at or below $70/barrel for the long term, Petrotyrants will survive to continue their nefarious activities for at least another 20 years to come.  China, too, will continue their current stance of propping up Petrotyrants. 

Thus, I say bring $120 on.  We outspent the Soviet Union on defense, and we can outspend the Petrotyrants while setting them up for an inevitable cornering and collapse.  Give me $120/barrel oil by 2010, and I will give you the demise of Petrotyranny in Russia, Iran, and Venezuela by 2015.  Count on it. 

Update (10/19/07) : We're up to $90/barrel already!  While there will be ups and downs in the traded daily price, and the gloomy media coverage might appear frightening, be patient and disciplined.  The short-term pain will lead to permanent long-term gain. 

Update (5/22/08) : Oil has crossed $120/barrel, and is currently as high as $133.  Such a rapid rise usually is followed by a precipitous drop, and we need the price to stay above $120 for an extended period to realize the benefits described in the article.  I might do a v 2.0 in 2008 itself if the price stays high. 

Related :

A Future Timeline for Automobiles

A Future Timeline for Energy

Terrorism, Oil, Globalization, and the Impact of Computing

Economic Growth is Exponential and Accelerating, v2.0

If we were to make a list of subjects ranked by the gap between the civilizational importance of the topic and the lack of serious literature devoted to it, historical acceleration of economic growth would be very near the top of the list.  I wrote an article on the subject way back on January 29, 2006 (version 1.0), but now it is time for a much more substantial treatise. 

To whet your appetite, read the article "Are You Acceleration Aware?", which is the critical piece of any attempt at Futurism.

In the modern age, we take for granted that the US will grow at 3.5% a year, and that the world economy grows at 4% to 4.5% a year.  However, these are numbers that were unheard of in the 19th century, during which World GDP grew under 2% a year.  Prior to the 19th century, annual World GDP growth was so little that changes from one generation to the next were virtually zero.  Brad Delong has some data on World GDP from prehistoric times until 2000 AD

If I put historical per-capita GDP through 2000 in a logarithmic timescale, we see the following :

Ggp_3_2

The theme of acceleration readily presents itself here, and even disruptive events like the Greagt Depression still do not cause more than a temporary deviation from the long-term trendline.  A different representation of the data would be to notice the shrinking intervals that it takes for per-capita World GDP to double.

10000 BC to 1500 : 11500 years without doubling

1500 to 1830 : 330 years

1830 to 1880 : 50 years

1880 to 1915 : 35 years

1915 to 1951 : 36 years (Great Depression and World Wars in this period)

1951 to 1975 : 24 years (recovery to trendline)

1975 to 2003 : 28 years

2003 to 2024-2027? : 21-24 years (on current trends)

This not only further reveals acceleration, but also indicates that massively disruptive world events still result in merely temporary deviations from the long-term trendline. 

Additionally, we can take the more granular IMF data of recent World GDP growth, and plot a trendline on it.  Both nominal and PPP growth rates are available, and are diverging due to the increasing size and growth rates of India and China.  Unfortunately, the IMF data only goes back to 1980, and 28 years are not enough to plot an ideal trendline, but nonetheless, the upward slope is distinct, and recessions (which still do not push World GDP growth into negative territory) are invariably followed by steep recoveries. 

Ggp

It is also important to note that the standard deviation of the IMF data for World GDP growth rates is about 1% a year, for both the nominal and PPP series (1.07% and 1.14% respectively, to be exact).  The rules of standard deviations dictate that 68% of the time, a data point will be within one standard deviation of the mean, 95% will be between two standard deviations, and 99.7% will be within three. 

Thus, in a simple example, if the World GDP growth trendline is currently at 4% a year, there is a 68% chance that the next year will be between 3% and 5%, and there is only a 0.3% chance that the next year will be below 1% or above 7% growth.  This means that a worldwide recession with a year of negative growth is extremely improbable, just as improbable as a year with stupendous 8% growth.  There is not a single year in the 1980-2007 IMF data with negative GDP growth, and virtually none under 1% growth. 

Pessimists like to say that "the Great Depression will happen again", but not only was the Great Depression at a time when the trendline was at a lower annual growth rate than today, but the Great Depression comprised of 6 years of GDP falling below the trendline, simply because it followed a period of many years where GDP was substantially above the trendline.  Furthermore, this was for US GDP.  World GDP's deviations may have been even less severe, as some nations, such as France, Japan, and China, were left relatively unscathed by the Great Depression. 

Now, what happens if we project these trendlines through the 21st century?   The dotted red line represents the median trend assuming that nominal and PPP growth rates converge at some intermediate level. 

Gdp2_2 

I can apply this trendline for World GDP growth, make assumptions of total world population to arrive at per capita World GDP growth, and add it back to the first graph.  The assumed growth rates, by decade, in per capita income are :

2007-2020 : 3.5%

2020-2030 : 3.5-4.0%

2030-2040 : 4.0-5.0%

2040-2050 : 5.0-6.0%

This leads to estimates for per-capita GDP at PPP, in 2007 dollars, to be :

2007 : $10,000

2020 : $15,155

2030 : $22,400

2040 : $32,600 - $36,000

2050 : $53,200 - $64,500

Which, when plotted, provides the following :

Ggplinear_6

Or, when a longer view is taken, in terms of logarithmic periods going back from the year 2050, we see :

Gdplog_3   

Needless to say, this degree of acceleration in economic growth affects nearly every possible facet of the world in the 21st century.  From a continually rising stock market to the proliferation of millionaires to the rapid upliftment of all metrics of human development, massive abundance is a certainty.  The inevitable derivatives of wealth, such as the spread of democracy, the upliftment in the sophistication of human psychology, and thus a corresponding drop in warfare, will soon follow.  Resolving current problems, such as reducing poverty in developing regions, to funding sophisticated healthcare technologies, to increasing literacy, to funding ambitious space exploration, are merely just a matter of time. 

Inevitably, even the average citizen in the mid-21st century will have access to many material and psychological opportunities that even the wealthiest of today do not have.  Turn that frown upside down, for you are in for an exciting time as you ride the tsunami of prosperity that is about to immerse you.

This article is the inaugural entry into a new category here at The Futurist titled "Core Articles".  These are the articles which are designed to form the cornerstone of a comprehensive understanding of the future, and are suggested reading for anyone interested in the subject.  Additional articles will be upgraded to "Core" status as augmentations to them accumulate. 

Related :

These Are the Best of Times

The Stock Market is Exponentially Accelerating

The Psychology of Economic Progress

The Age of Democracy

The Winds of War, the Sands of Time

Are You Acceleration Aware?