NASDAQ 11,743?

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.



36 Responses to “NASDAQ 11,743?”

  1. Gravatar of Brian Donohue Brian Donohue
    23. December 2019 at 11:56

    ” I believe that Russia is by far the greatest threat to US national security…”

    Damn, you must have hated Obama’s foreign policy, telling Romney in 2012 that the Cold War was 20 years ago, stifling the push to arm Ukraine, pivoting to Asia. You kept it pretty much to yourself, but you most have been seething at the guy the whole time.

  2. Gravatar of ssumner ssumner
    23. December 2019 at 12:46

    Brian, I had no problem with Obama’s Russia policy; he imposed sanctions after the Ukraine invasion.

  3. Gravatar of Mike Sandifer Mike Sandifer
    23. December 2019 at 13:34


    I agree completely with your comments about trade policy with China and national security, but take issue with your characterization of peak Nasdaq being a bit optimistic before the crash. You’ve commented before that the Nasdaq run-up during that period seemed “fishy”. What looks suspicious to you?

  4. Gravatar of Brian Donohue Brian Donohue
    23. December 2019 at 13:52

    Trump has lifted none of Obama’s sanctions, and added some more.

    Trying to square this with “the fact that Trump really is Putin’s puppet” as some genius once wrote.

  5. Gravatar of Gene Frenkle Gene Frenkle
    23. December 2019 at 14:12

    The only commodities that are important with respect to “national security” are oil and natural gas and fracking has solved that issue. Cheap steel is great for national security because we can build infrastructure and equipment more cheaply. So in the event of a national security emergency we would need to use whatever equipment we have and use whatever infrastructure is available. If we need some steel mills here just in case then you simply give them money directly.

    Once again, the issue from 2001-2008 was a quiet energy crisis and that is what undermined economic growth in numerous ways. American natural gas production plateaued in the context of rising prices. Global oil production plateaued in the context of rising prices. Any macroeconomic theory about what happened from 2001-2008 must explain why those two important commodity markets failed to behave like all of the other commodity markets.

  6. Gravatar of art andreassen art andreassen
    23. December 2019 at 14:18

    Scott: Despite the fact that Russia’s economy is the size of Italy’s you still fear it more than China, really? It is hard to believe that China will not shortly replace the US as the dominant power. Since 1945 the international trading system was solely managed by the US with the EU an outside observer providing disparaging comments. Seeing how China has toyed with its client state North Korea and with Venezuela for example, do you really think the future will be as free and prosperous as the Post-War past was?

    I have never seen you mention Mohamed El-Erien. You might find his lengthy twitter interview today with Christopher Gisiger @CGisiger TheMoney interesting.

  7. Gravatar of John Hall John Hall
    23. December 2019 at 14:38

    This post would be better with a chart showing the ratio over time…

  8. Gravatar of Gene Frenkle Gene Frenkle
    23. December 2019 at 15:35

    I agree with you that Greenspan was wrong when he said the Tech Bubble was “irrational exuberance”. What we know now was that the exuberance was rational because investing $10k in the right company could have made one a millionaire. Contrast that with the Housing Bubble which was irrational exuberance and essentially a game of “hot potato” in which someone would take out a $200k mortgage hoping to make $50k…which is great but that is not only a big risk for someone with little wealth but also makes moving to get a better job more difficult.

  9. Gravatar of dtoh dtoh
    23. December 2019 at 16:10

    1. Disagree

    2. Agree

    3. Disagree

    4. Agree with first part. Strongly disagree with the second part.

    5. Used to agree in general with “prosperity brings democracy, peace, etc.” Doesn’t seem to be the case for China. Wasn’t the case for Japan in the 30s. Sometimes prosperity can not dislodge corrupt power.

    6. Disagree. (Wasn’t Joe McCarthy your Senator?) 🙂

    This information is helpful. Makes it a lot easier to read some of your posts. I used to worry that your logical faculties were declining. Now I see it’s just a problem with flawed premises 🙂

  10. Gravatar of ssumner ssumner
    23. December 2019 at 16:35

    Brian, You said:

    “Trying to square this with “the fact that Trump really is Putin’s puppet” as some genius once wrote.”

    Easy. He knows that both the Dems and the GOP in Congress do see the Russian threat, and would overturn him on sanctions. He does what he can for Putin, at the margin.

    Art, I don’t fear GDP, I fear aggressive powers with lots of nukes.

    China may change and become an expansionist power. But today they are no where near the threat that Russia is. Russia has far more nukes, and an attack on the US is more likely to come from Russia, if only because there is more chance of an accidental missile launch when you have so many.

    I don’t know if the world will be as free and prosperous in the future, but launching a cold war with China certainly won’t make it more free and prosperous. Nor does Trump’s support for dictators make the world freer.

    John, Yes.

  11. Gravatar of ssumner ssumner
    23. December 2019 at 16:37

    dtoh, I assure that my logical powers are declining, which is inevitable at age 64.

  12. Gravatar of Benjamin Cole Benjamin Cole
    23. December 2019 at 16:42

    Russia is mostly a no-show in the Asian-Pacific. In contrast, Beijing is bruiting about quite a bit, has declared the entire South China Sea a Beijing pond, and North Korea appears to be a Beijing client state.

    If the US should dissolve treaty obligations in the Asian-Pacific and withdraw, then China would probably not pose a threat to the United States, at least for many decades. That might actually be a sensible move for the United States and taxpayers.

    But the US military is not about defending the United States from a military invasion, it is about being a global guard service for multinationals. So pony up your tax money.

    Meanwhile, the S&P 500 is up 28.5% year-to-date. Trump’s tariffs are horrible horrible bad! TEOTWAWKI!

  13. Gravatar of Mark Mark
    23. December 2019 at 17:43

    Art, what does China have to do with Venezuela? Venezuela and North Korea are poor because of primarily communistic domestic policies and secondarily US sanctions. Non-communist countries that are receiving large amounts of Chinese investments are growing quite well, such as Ethiopia today compared to in the 1980s. In fact, the developing world as a whole has seen growth accelerate since 2000 when China started becoming a major trading nation. Thus, I do believe that the future world will be freer and more prosperous than the post-war world (which was only free and prosperous for maybe 20% of humanity).

    Dtoh, historically, Japan was developing into a democracy in the 1920s as it became economically developed. This was known as the Taisho democracy period. Japan only regressed into a militaristic dictatorship by the 1930s because of the outbreak of global protectionism in the Great Depression and the proto-Keynesian stimulus that Japan used to counteract this protectionism, which funneled large amounts of money and power into the military. Western powers’ rejection of the Japanese anti-racism legislation in the League of Nations also played a big role in discrediting Japanese liberals and foster Japanese militarism. If not for racism, protectionism, and the Depression, it’s quite possible that Japan would have peacefully become a democracy and East Asia would look much better today. Let’s not repeat those mistakes with China.

  14. Gravatar of Dtoh Dtoh
    23. December 2019 at 18:25


    You and me both.

  15. Gravatar of Benjamin Cole Benjamin Cole
    23. December 2019 at 18:53

    Here is an odd one: Some globalists say the US should have global treaty obligations, and honor them.

    OK, suppose Kim Jung Un, who seems a bit nutty, is ill-advised or even misled by his zealous intel services, and decides to launch missile and rocket attacks on Seoul? He thinks an invasion is pending.

    It is said North Koreans have enough such weapons to obliterate Seoul.

    So, South Korean and US troops respond, and then invade North Korea to get at the missile and rocket sites.

    Beijing moves to defend its client state North Korea, and sends in troops.

    This scenario is hardly outlandish, and something similar happened in the first Korean War.

    This scenario alone would fantastically expensive and scary for the US, but could easily get worse.

    Fearful of losing the Second Korean War, North Korea—-or even rogue element—- sends a nuke or two into North America.

    No one should say “Oh, it would not be in Beijing’s or Kim Jung Un’s interest to start a war, or persist.”

    Miscalculations are rife in history. Why did Hitler persist against Moscow? Why did Tokyo bomb Pearl Harbor? Why did the US go into Vietnam Afghanistan or Iraq? Or Russia into Afghanistan?

    Khrushchev and Kennedy nearly entered the world into a nuclear war in 1962 (in fact, the Joint Chiefs of Staff advocated as much, and rogue US elements tried to trigger such a war).

    The US taxpayer and citizen night be better served by Washington getting out of the Asian Pacific.

  16. Gravatar of P Burgos P Burgos
    24. December 2019 at 03:09

    I am not convinced that money is neutral over the long term. Perhaps I simply don’t understand the phrase, but I cannot square the empirical results that people who graduate during a recession earn less money over their lifetimes than those who graduate during an expansion with the idea that the money supply doesn’t impact longs term real economic growth. Empirically it seems that recessions permanently impair human capital formation for a whole cohort of youth. So if bad management of the money supply puts a permanent dent in the skills acquisition of a portion of a nation’s population, how can money be neutral? Similarly, one could put forward a reductio ad
    absurdum argument that if money is neutral, recessions are not bad things. Because if money is neutral and no one is harmed in the long term, why worry about them? I think that if you believe that a recession can permanently lower a persons real income, than you cannot hold the view that money supply doesn’t impact the real economy over a long time frame, given that people have working lives of 30-45 years.

  17. Gravatar of P Burgos P Burgos
    24. December 2019 at 03:10

    Trump and the ACA are also two examples of why money supply isn’t neutral. Recessions have a big impact on political outcomes.

  18. Gravatar of Michael Rulle Michael Rulle
    24. December 2019 at 08:09

    Scott said —“The overall tech bubble was actually not all that irrational”——implying I believe that it was at least “partially irrational”——which is quite an admission. Using NDX futures plus fed funds as a proxy——-which while definitely investable still raises some issues—-from June 24 1999 until 12/23/2019 the annualized total return including dividend reinvestment was 7.38%——higher than S&P 500 (6.05%) with a statistically not significant lower Sharpe or .20 versus .26.

    Though not my normal take, in the long run these returns are about what one expects in the long run——(although Shiller calculates it much higher at about 9.05% for last 148 years.)

    This implies that Scott’s normal take of rational pricing in the long run may “not be all that irrational” either. The “all that” qualifier is the right tone or phrasing. But we did have an amazing double tap set of price dumps between 2000-2009.

    (As an aside I am unable to view timeframes of less than 20 (I prefer 50) years as meaningful—-and of course that assumes society evolves without collapsing. )

  19. Gravatar of Michael Rulle Michael Rulle
    24. December 2019 at 08:40

    To continue—-the peak to peak returns for the 2 indices (July 2000-Dec 23 2019) drops returns to 4.86 and 5.63, respectively for the two indices—-so less impressive. Re: Scott’s 6 comments on Tyler’s easy my responses are

    1. Agree with the statement—-in its literal form
    2. Agree with the statement—-in its literal form
    3. I agree with the general statement—caveats less important
    4. I agree with this statement—-Scott does not fully explain it here, but I think we all know what is meant
    5. Agree with the statement
    6. Scott does not get my clean sweep. I disagree. —-although the NK as distant second in the world, I do agree. But Russia——I do not think they have the required desperation to be a meaningful,threat. I am unsure they are even a threat at all——so even if they are a “biggest threat” the “by far” implies to me a qualitative assessment I do not accept.

  20. Gravatar of Michael Rulle Michael Rulle
    24. December 2019 at 08:47

    The biggest threat is clearly China—-but as my answers above show—-it is based on other factors than what Scott cleverly circumscribed. Nominally (nominally matters) they may be largest economy in 15 years or sooner or never. Being a dictatorship is a problem. Lots of uncertainty. I look forward to a post Xi leader—-who leans further away from Mao in spirit.

  21. Gravatar of Tuesday assorted links – Marginal REVOLUTION Tuesday assorted links - Marginal REVOLUTION
    24. December 2019 at 09:23

    […] 5. Arnold Kling’s books of the year.  And Scott Sumner responds to me on national security and trade. […]

  22. Gravatar of Per Kurowski Per Kurowski
    24. December 2019 at 10:21

    Don’t concern yourself solely with trade.
    The risk weights in the risk weighted bank capital requirements are to access to credit wars, what tariffs are to trade wars, only more pernicious.”

  23. Gravatar of bill bill
    24. December 2019 at 10:24

    Greenspan first said Irrational Exuberance in December 1996. Clearly he was wrong.

  24. Gravatar of Gene Frenkle Gene Frenkle
    24. December 2019 at 13:07

    Rulle, maybe the “check” on Chinese aggression is that they export things people don’t really need and aren’t unique to China. So Saudi Arabia exports oil and Russia exports natural gas. America exports food and commercial airplanes and gasoline and industrial equipment. So Airbus can only make so many planes a year and it would take a very long time to develop an airplane industry. We can develop supply chains in other countries for the products China makes if China doesn’t behave, Europe can’t really get natural gas from another source.

  25. Gravatar of Ian Maitland Ian Maitland
    24. December 2019 at 15:22

    I can understand why Scott thinks that Trump is a mercantilist. But I don’t understand why it matters. The game has changed. What Trump wanted back then (or even now) strikes me as being entirely beside the point. We would be foolish to miss the opportunity to make national security the paramount consideration now.

    It is also bizarre to talk about the trade deal in the past tense. We may well still be in the first quarter. The question is whether the (interim) deal augurs well for future negotiations.

    I don’t know anyone in the US who wants a cold war. But what is the realistic alternative? Let’s stop kidding ourselves: There is no turning the clock back to 2010. The communist party is weaponizing China’s economy and the country’s trade relations with other countries. And nowhere is the mobilization of the Chinese economy more apparent than on the communications technology front.

    A richer China is what we all wish for. But a Chinese economy whose priority is to prop up the communist party’s base will mean a poorer China. The same is true of China’s investments in building its capacity to project force beyond its borders. Putting guns before butter will make for a weaker economy — and possibly one where the communist party’s legitimacy depends on military adventures.

    I don’t like it either, and maybe it won’t happen, but is isn’t a risk we can afford to take.

  26. Gravatar of Gene Frenkle Gene Frenkle
    24. December 2019 at 16:05

    Ian Maitland, the notion building a 5G network with Chinese supply chains and building infrastructure with inexpensive Chinese steel somehow “weakens” our national security doesn’t make any sense. Once again, using 20 million barrels of oil a day supplied largely by Middle Eastern oil exporters was a huge national security issue and Republicans didn’t care about it when Bush was president!?! Building LNG import terminals in order to import LNG from Russia and Iran was a huge national security risk but in the Bush years Republicans promoted a those import terminals!?! If China invades a country we can easily sanction them and then develop supply chains in other countries, so we are in a position of strength with respect to China. In fact the reason the Civil War was essentially over pretty early was because Great Britain had another source of cotton and cotton was relatively easy to store, so the South overplayed their hand hoping Great Britain would need their cotton.

  27. Gravatar of Christian List Christian List
    24. December 2019 at 22:14

    You really have to enjoy Scott’s partisan craziness. Trump’s insistence that the NATO partners finally spend 2% on armaments. Trump’s sanctions against Russia. Trump’s arming of Ukraine with lethal weapons. Trump’s sanctions against Germany to sabotage the Nordstream deal of Putin and his buddy Schröder. These are all strong leads of course, “that Trump does what he can for Putin, at the margin”.

    In comparison, the pro-Russia campaign of the media and Obama, which probably peaked in 2012 but started before that and continued after that, was of course a clear indication that Obama and his dear media have always been right about Russia.

    Scott, you are simply so biased on the subject of Russia and China that you add twist after twist, and lie after lie, just to save your grotesque theories.

  28. Gravatar of Gene Frenkle Gene Frenkle
    25. December 2019 at 09:52

    Christian List, Russia’s most successful disinformation campaign was to vilify fracking and get Europe to ban the technology. Believe it or not Hillary Clinton actually promoted fracking in Europe as SoS and so that is one reason Putin hates her. So by the time Trump showed up in 2015 fracking was banned in Europe. Trump promoting LNG in Europe is small potatoes because LNG will always be more expensive than piped gas. Plus Trump pulling out of Syria helps Russia because the real threat to Russia’s natural gas dominance is a pipeline from the Middle East to Europe.

    Let me clarify something—many people are still under the impression that oil is Russia’s most important export which was true during the Soviet era, but now piped natural gas to Europe is Russia’s most important export.

  29. Gravatar of Christian List Christian List
    25. December 2019 at 20:28


    these disinformation campaigns against fracking (and nuclear power) are very well possible, but it is also a waste of resources, because most European countries (Germany as a prime example) are so ignorant all by themselves.

    Americans might believe what you said about Russian oil, but even this I do not believe.

    The gas trade is indeed extremely important to the USSR since at least the 1970s. It is often overlooked that even during the so-called “Cold War” the gas trade between Europe and the USSR always worked. I think it didn’t stop for a single day during the whole Cold War.

    It is indeed sad how dependent Europe makes itself on Russian gas. On the other hand of course, the dependence also exists the other way round, even if Russia has become a little more independent in this area in recent years because of China.

  30. Gravatar of Thaomas Thaomas
    26. December 2019 at 03:11

    If the Trump administration ware interested in geopolitical power against China, which is not a silly objective, it would be promoting trade via a strong TPP, recruiting high-skilled immigrants and students from from the world, increasing consumption taxes to eliminate the structural (“full employment”) federal deficit.

  31. Gravatar of George George
    26. December 2019 at 17:45

    Only brainwashed Americans would consider Russia a security threat. When was the last time Russia threatened the United States? When was the last time Putin has invaded a country?

    And if you dare point to crimea, then please note that there was no invasion. The crimean people voted overwhelmingly to be a part of Russia. It is not our problem that Ukraine along with most of europe and usa did not accept that democratic vote. Why? Because the black sea is an important strategic location. Russia is only defending the popular vote of crimea. And if you doubt this, go to crimea and randomly ask people if they want to be a part of Russia. 80% will say yes. Even before it was annexed, most people identified as Russian because Russia and Crimea have a relationship that has spanned 1000 years. So if your support democracy as a universal right, then the vote of the people should matter in all cases, not just in cases where it benefits you.

    Ever since you were a child, you grew up being told that Russia is the big bad enemy, and everywhere you went that idea was reinforced by the media and your peers. In addition to that, you’ve spent most of your life behind a desk. So as a result, you have a very narrow, and warped view of the world.

    The USA has been responsible for more deaths in the last 50 years then all other countries combined. Vietnam, Iraq, Libya, Syria, Afghanistan, not to mention the instability and indirect deaths created by supporting drug regimes in latin america, and proxy wars in asia.

    If there is one country to fear, its the county your living in my friend.

  32. Gravatar of George George
    26. December 2019 at 17:50

    And if you are referring to elections, then please be advised that Russia has been trying to influence elections since the 1950s. Just like america attempts to influence elections around the world, including Russian elections, and so many others. That is normal. And every intelligence agency does that.

    So nothing new here. The only reason why its news, is because the election was such a big upset that the political party could only save face by pointing to external factors. They obviously cannot blame a poor campaign, poor candidate, poor ideas, etc, etc.

  33. Gravatar of ssumner ssumner
    26. December 2019 at 20:52

    Ian, China doesn’t want a cold war, we do. China wants to become a great power.

    George, Yeah, that was Hitler’s argument when he took the Sudetenland. I’m not buying it.

  34. Gravatar of Gene Frenkle Gene Frenkle
    26. December 2019 at 21:30

    Professor Sumner, do you read the Hollywood trade magazines?? They often refer to China as the “Middle Kingdom”. I guess they are doing that to show respect for China because China has become so important to the box office. The Middle Kingdom certainly conveys a sense that China wants to be a great power.

  35. Gravatar of msgkings msgkings
    27. December 2019 at 09:19


    Even if you set aside the supposed desire of the Crimeans to be taken over, Putin is still currently occupying much of the eastern half of the rest of Ukraine. That’s a plain old invasion.

    Personally, I don’t think either Russia or China is interested in major territorial expansion. China definitely wants to become a hegemon like the US though.

  36. Gravatar of Len Len
    28. December 2019 at 21:05

    Speaking as someone living in South East Asia, China becoming a great power is a frightening scenario. The amount of military/economic/geopolitic power they have at the disposal of a dictatorship would be a huge threat to every country here, where our governments would have little choice but to capitulate on issues of trade, territory, tech, and so on.

    It’s not certain that China will use their new power for ill, but it is a massive risk that I am very grateful that the US is making attempts to check this power.

Leave a Reply