TABLE OF CONTENTS

 

 

Preface
Introduction
 
CHAPTER 1
MYSTERIES, PUZZLES, AND PARADOXES OF THE NEW ECONOMY         1
The New Economy of the 1990s         1
Was the New Economy of the 1990s Real?         3
Why Were the 1990s So Great?         5
Is There Too Much Optimism or Too Much Pessimism?         7
Are We Heading for Deflation Like Japan in the ’90s or the U.S. in the ’30s?         9
Can the Future Be What It Used to Be?         10
 
CHAPTER 2
SOLVING THE MYSTERY:  MISSING PRODUCTIVITY AND THE GREAT INFLATION MISMEASURE         11
Demographics:  Baby Boomers, Working Women, and the Super Bull Market         11
Three Hits and a Miss         15
Where’s the Missing Productivity?         15
The Boskin Reports on the CPI         19
“Faster, Better, Cheaper”—The Parable of the Pink Caddy         21
The Intel–Microsoft Double Helix and John the Barber’s PC         23
The Consumer Knows Best         24
How the Government Counts Quality Improvement         26
Solving the Mystery of the New Economy         28
 
CHAPTER 3
THE THEORY OF DIGITAL DEFLATION: FASTER, BETTER, CHEAPER
Digital Deflation Is A Good Thing         31
Digital Deflation Defined         32
The Digital Drivers         35
The “Next Big Thing”         39
Is the Digital Revolution Better Than the Industrial Revolution?         40
The Laws of Digital Deflation         41        
How Big Is Digital Deflation?         43
What’s Missing from the GDP Deflator?         47
The Lost Components         49
 
CHAPTER 4
WHY THE OLD MODELS DIDN’T WORK IN THE 1970s AND 1980s         53
Economic Models Work Best in Times of Stability and Few Surprises         53
The 1950s and 1960s: Existing Economic Models Worked Well         54
The Late 1960s/Early 1970s: Models Break Down with the Rise in Inflation         55
Internal Disruption from Wage-Price Controls         56
External Disruption from OPEC Oil Price Increases         59
The Late 1970s: Hyperinflation         59
The Demise of the Keynesian Dynasty         60
Monetarism Takes the Lead         60
The 1980s: Volcker to the Rescue         62
The Early 1980s: Enter the Supply-Siders         64
The Late 1980s: Market Price Rule Predictors         67
Demographics—Why the Traditional Models Didn’t Work         69
Demographic Forces Turn Positive in the 1980s and 1990s         71
 
CHAPTER 5
WHY ECONOMISTS HAVE DIFFICULTY EXPLAINING THE NEW ECONOMY         74
The Amazing 1990s—Strong Growth and Low Inflation         74
Information Technology, Productivity, and the New Economy         77
Overstated Inflation and Undermeasured Productivity         78
Was the Internet Driving the New Economy?         80
Digital Deflation—Why the Old Models Didn’t Work in the 1990s       80
Productivity from Digital Deflation Is About Quality, Not Quantity         83
What the Government Didn’t See…         86
…Consumers and Investors Could See         87
The Year 2000 Lockdown         88
The Wealth Effect—A Rising New Force in the New Economy         92
Is There a Corporate Wealth Effect?         95
Investor-Consumers         95
New Models Needed         96
 
CHAPTER 6
REDEFINING THE NEW ECONOMY         98
New Forces in the New Economy         98
What Is the New Economy?         99
Digital Deflation Redefines the New Economy         100
Old Economy Companies in the New Economy         103
The Importance of R&D         106
The Old Economy Will Lose Share and Profits to the New Economy         107
How the New Economy Lifts Productivity         108
Structural Productivity Gains         109
When Did the Government Start to Measure Digital Deflation?         110
How Did Computer Quality Improvement Boost Productivity in the Late 1990s?         112
Massive Implications for Productivity Across the Economy         114
Software Quality Improvements Are Elusive but Real         115
Communication Services Are Getting Faster, Better, Cheaper         117
The Huge Healthcare Quality Mismeasure         119
The Service Sector Is Grossly Undermeasured         120
The Service Sector Supply Chain         122
Solving the Mystery of Rising Capital Spending and Declining Productivity         124
The “Productivity Revolution” Is Under Way         126
Disaggregation into the New Economy and the Old Economy         128
 
CHAPTER 7
NEW MODELS FOR THE NEW ECONOMY         129
Better Models, Better Forecasting         129
 
I. Demographic Models         130
A Demographic Foundation for the New Economy         130
The Demographic–Inflation Model         131
The Demographic–Stock Market Model         135
The Demographic–Productivity Model         135
Demographic–Productivity Model Adjusted for Unmeasured Digital Deflation         136
Demographic–GDP Models         137
The Stock Market and Real GDP         137
The Stock Market and Corporate Profits         139
“Potential Productivity”         139
 
II. Productivity Models         140
The Capital Spending–Productivity Model Revisited         140
How Long Has the Government Undermeasured Productivity?         142
Productivity and Profit Margin Model         143
The 120% Profit–Productivity Rule of Thumb         145
The Over 3.0% Productivity Growth Rule         146
The New Economy Productivity–Profit Enigma         146
Are Quality Gains Empty Calories?         148
The Fed’s Productivity and Capital Decomposition Model         151
New Models for Predicting Information Technology’s Contribution to GDP and Productivity         153
 
III. Digital Deflation Models         156
Estimating the Undermeasurement of Digital Deflation         157
The “GDP Deflator-Digital Deflation” Model         159
Computer and Semiconductor Digital Deflation “Lost” As Intermediate Goods         161
IT Industries Not Yet Measured for Quality Improvement, Including Computer Services, Software, and Communications         163
Non-IT Industries Not Yet Measured for Quality Improvement, Including Healthcare, Financial Services, and the Military         167
The Quality Improvement Quotient         172
The “CPI-Digital Deflation” Model         173        
 
IV. Wealth Models         177
Household Tangible and Net Financial Assets         177
The Wealth Effect         181
The Consumer Wealth Effect         181
The Realized Capital Gains Wealth Effect         185
The Corporate Wealth Effect         186
 
CHAPTER 8
THE WEALTH IN OUR FUTURE         191
The 2020 Vision      191
A Wide Range of Possible Outcomes         193
Value Created from Digitally Driven Quality Improvement      194
Two More Decades of Value Creation      196
Value to Wealth: The New Economy’s Virtuous Circle         198
Measuring Wealth         200
Adjusting Wealth for Digital Deflation         202
A Strong Demographic Foundation for Generating Wealth         203
The Digital Deflation Wealth Multipliers         206
The Key to Wealth Is Low Inflation         207
A “Near Zero Experience”         208
Picturing Zero Inflation Will Be Difficult for Many         209
The GDP Deflator Adjusted for Digital Deflation         210
The CPI Adjusted for Digital Deflation         212
Why the CPI and GDP Deflator Will Diverge         213
Which Is the Right Inflation Rate?         214
Four Scenarios for the Wealth In Our Future         215
Fair Value P/E’s and Wealth         217
 
CHAPTER 9
THE NEW ECONOMY STOCK MARKET         218
The Importance of Equities         218
A “New Economy Stock Market Model”         219
Inflation, Interest Rates, and Fair Value P/E’s         224
P/E Ratio Forecasts for the Next Two Decades         228
Higher Productivity and Profit Margins in the Next Two Decades         229
New Economy Stock Market Projections         236
Two More Decades of Wealth Creation         236
A New Economy Wealth Model         239
Growth in Equity-Like Assets         240
How Digital Deflation Helps Homeowners Build Wealth         242
Digital Deflation Helps Tangible Assets by Driving Interest Rates Lower         243
The Enormous Upside Potential for Wealth Creation in the United States         244
On the Upside         245
On the Downside         247
Most Likely Scenario         248
The Surprising Importance of the Real Bond Rate         248
Stocks, Wealth, and the New Economy         252
 
CHAPTER 10
MONETARY POLICY:  NEW “SPEED LIMITS” FOR THE FED         255
The Fed’s Challenge         255
A Tale of Two Economies         256
Avoiding a Repeat of the 1920s and 1930s         260
Learning from the 1920s and 1930s         265
Counting Quality Improvement Will Make the Fed’s Job Easier         266
New Speed Limits for the Fed         268
Running Out of Room at the Fed         273
Lessons from Japan’s Deflationary Slump         275
Productivity Gains in a Deflationary Economy         278
The Past and Future Fed         281
 
CHAPTER 11
FISCAL POLICY AND BETTER DATA IN A DIGITALLY DEFLATING WORLD         283
Wealth and Poverty in the New Economy         283        
Wage Earners Will Earn More         286
The New Economy, Unemployment, and Crime         288
The “Politics Of Need”         290
Better Data for the New Economy         292
The New Economy and Budget Surpluses         294
The Dark Side of Demographics         295
 
CHAPTER 12
WISE INVESTING IN THE NEW ECONOMY         299
Real-World Investing         299
Real-World Results         301
Did the Internet Boom Spike the Punch?         304
Investing Wisely in the New Economy         306
Pointers for Investing in a Resurging New Economy         307
The Prelude to a New Era of Prosperity         312
 
CHAPTER 13
DIGITAL DEMOCRACY: GLOBALIZATION OF NEW ECONOMY         315
New Economy Entrepreneurship         315
Digital Democracy         316
Counting Digital Deflation and Productivity Properly         319
Japan and China Can Create Enormous Wealth         320
Europe Must Recognize Digital Deflation to Optimize It         322
Cowboy Capitalism and Wealth Creation         326
The Soviet Experiment         327
Digital Deflation and the Dollar         328
Global Prosperity Will Lift All Boats         330

 
CHAPTER 14
THREATS AND OPPORTUNITIES:  MAKING THE WORLD A BETTER PLACE         331
Making the Digital Revolution Better Than the Industrial Revolution         331
The Politics of Better Data         333
Fixing the Third Rail         335
Better Healthcare from Better Data         338
Moving Faster with the Fed         339
How Much Does the Fed Know?         340
One Foot on the Brakes and One Foot on the Gas         343
Capital, Labor, and Technology         344
Managing Booms and Bubbles         346
Quality Improvement and Degradation         347
Making the World a Better Place         348
 
EPILOGUE
CLOSER TO DEFLATION THAN YOU THINK         355
 
FIRESIDE CHAT INTERVIEWS WITH CREATORS OF DIGITAL DEFLATION         357
Interview with Gordon Moore  (Intel)       357
Interview with Richard S. Hill  (Novellus)       363
Interview with Doug J. Dunn  (ASML Holding, N.V.)       367
Interview with Michael Dell  (Dell Inc.)      374
Interview with Irwin Jacobs  (Qualcomm)       376
Interview with Stephen Fodor  (Affymetrix)       381
 
APPENDIX A: Tanaka Capital Management P/E Conversion Table         392
APPENDIX B: Household Tangibles, Financial and Equity-Like Assets, and Net Worth         393
APPENDIX C: Decades of Growth in Equity-Like Assets         394
APPENDIX D: Wealth Models         395

 
REFERENCES         396
INDEX         407
ACKNOWLEDGEMENTS         417

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