Crisis in Wonderland

Charles Lutuidge Dodgson (1832-1898) was a mathematics teacher at Oxford University.  Although he authored many a mathematical treatise, he is better known for his seemingly nonsensical writings. He was a charming writer whose children’s classics were really interleaved with innocuous yet sublime mathematical foundation. To adults these stories are ingeniously splattered with reality, satire and logic. To the world, he is better known by his pseudonym, Lewis Carroll, the author of Alice in Wonderland.

 “I shall do nothing of the sort,” said the Mouse, getting up and walking away.  “You insult me by talking such nonsense!”

In a past article (April 23^rd), I had mused on the link between marriage and mathematics. A bright young man sent me Email to ask me if these are really linked. Being neither bright nor young, I seem to have forgotten what I had written. But thinking of marriage makes me think of churches and temples; and churches and temples have pigeons. And of course, there is a principle in mathematics, named after pigeonholes. Using that principle, we can deduce that if a person lives in a N bedroom house, and marries N+1 spouses (or spice) then there would be at least one bedroom with more than one spouse.

“Once upon a time there were three little sisters,” the Dormouse began in a great hurry; “and their names were Elsie, Lacie, and Tillie; and they lived at the bottom of a well.”

While pigeons are happy eating caterpillars (and caterpillars do not tend to smoke hookahs or give advise) we humans tend to pigeonhole the events and conditions of our lives, our well being and our success (or failure) into numbers. Often these numbers are statistical and sometimes they are monetary. There are three important numbers that embody all of the economic activity all over the world. And these numbers have names such as DJIA, S&P500 and NASDAQ. These numbers, also called Stock Indices, are indicators of the valuation of the stock market. The stock market is an indicator of the strength and viability of the business based economy.

Of these three numbers, the DJIA is the oldest and the best known. DJIA stands for the Dow Jones Industrial Average, often simply known as “The Dow”. It is a weighted sum of the stock prices of 30 very well known, large, multinational companies. Some examples are Coca-Cola, IBM, Boeing, Microsoft and Disney. While the Dow and the companies in it are based in the US, every financier in every corner of the world keeps a daily eye on the Dow. The S&P500 is a broader index, comprising of 500 large companies, while the NASDAQ covers 100 companies, mainly in the technological sector.

The Dow is just a number. At the end of the day on April 25^th, 2001, the Dow was 10,625. In isolation, that number look meaningless. But, the Dow has been a remarkable barometer of growth, well being and is the most respected indicator. In 1960, the Dow was about 600. It climbed to 750 by 1970. By 1980 it had just moved up to about 850. A 40% gain in 20 years is quite pathetic. These two decades were decades of malaise, of stagflation, of we are going nowhere bleakness.

“Curiouser and curiouser!” cried Alice .

Then one morning in January 1981 Ronald Reagan, the somewhat failed actor, rode into Washington DC, with his cowboy hat and his Cheshire Cat grin. At his inauguration the famed number shone at 950. Four years later, it had wowed the investment community by catapulting to 1200 (a gain of 26% in 4 years). While economists and politicos and the media wrestled horrendously whether Mr. Reagan had anything to with the Dow, Reagan came roaring back for his second term as the President of the United States, and bellowed “You ain’t seen nothing yet”.

For once, a prediction was right. When Reagan passed the mantle of his newfound 8 year old dynasty to George Bush, the Dow watchers were dizzy with vertigo. At Mr. Bush’s inauguration in January 1989, the Dow Jones Industrial Average was at an unbelievable 2200 (83% in 4 years). And of course, we have never looked back almost ever again. William Jefferson Clinton beat the so-called failed presidency of Mr. Bush and beamed into office when the Dow had reached 3300 (50% in 4 years). Of course, at Clinton’s second inauguration, the climb kept a steady course and reached 6500 (96% in 4 years). Finally, when Mr. Clinton dejectedly yielded power, to the second generation of the Reagan Dynasty, George “W” Bush Jr., the Dow shone at 11,000 (70% in 4 years).

Today, the rose tree in the Croquet Court is no longer blooming. In April 1999 the Dow was at 10,500, about the same as today. For two years, the number has barely moved. In fact, last month the Dow had hit a low of 9,571. For two years we have spiraled down the long dark tunnel, falling sharply but slowly as if in a trance, but not hitting the bottom. Worse, the Dow does not tell the whole story.

“Who cares for you?” said Alice, “You're nothing but a pack of cards!”

The full story is much more sordid. While the Dow is in a holding pattern the real bloodbath is in the NASDAQ. The NASDAQ is the barometer of technology. Just as the Internet was coming on-line, in 1995, the NASDAQ was at 1000. And then came the big bang. By the end of 1998, the NASDAQ doubled to 2000 and then by the year 2000 it doubled again to 4000 and in March 2000 it hit 5000. Soon, the words of the worlds second most powerful man, Mr. Alan Greenspan’s words hit home: “Irrational Exuberance”. The reverberation of this famous saying suddenly broke the bubble and the NASDAQ tumbled like a house of cards, to 1,800.

The sky has just fallen. The world is coming to an end. Billions, if not trillions of dollars disappeared into thin air (well, it came from thin air too). Even the plunge in the NASDAQ does not tell the whole story. The stock of the hugely successful bookseller, Amazon had a price of  $150, today it has a price of $9. CMGI was a hugely successful company that provided the venture capital, for the majority of Internet commerce, and reached a peak of $200. Today each share is just $2. Large numbers of well-known Internet companies are in bankruptcy.

“Collar that Dormouse,” the Queen shrieked out.  “Behead that Dormouse!   Suppress him!  Pinch him!  Off with his whiskers!”

“Off with his head” is almost the chorus that is being sung in the corporate corridors of high tech America. The dot-coms that ruled the planet just a year or two back, are closing their doors at an alarming pace. The web sites are dark. The buildings are deserted and thousands of highflying web designers are out of jobs. The joke about the dot-com billionaire who sold his Porsche, and moved back to live in his parent’s basement is no longer very funny.

The dot-coms were small companies who provided some gimmicky web based services and attracted more capital from the stock market than they could manage to spend. As the stock market skidded the flow of cash evaporated and then they had to close down en-masse. The dot-coms started the tumble, but today most technological giants are sliding down the slippery slope.

“Well!” thought Alice to herself, “after such a fall as this, I shall think nothing of tumbling down stairs!”

The shock waves have rippled though almost the entire economy. Corporate giants are in a frenzy of cost cutting and the victims are workers. In the last few weeks, HP laid of 4,700 people, Lucent lost $3.5 billion in 3 months, (and cannot find it under the mattress). Lucent saw its stock price drop from $60 to $10 in less than 8 months and had to do away with over 10,000 jobs. The semiconductor manufactures are devastated too, they say “No one is buying chips”. The big bully Intel is writhing, Motorola is in pain and the smaller companies are wondering what hit them so hard. Lay-offs, entrenchments, mandatory unpaid vacation, work slowdowns, production cuts and bankruptcies are all becoming everyday words.

“Down, down, down.  Would the fall never come to an end!  “I wonder how many miles I've fallen by this time?”

The slide is not just numbers and a few jobs. The world economy in general and the US economy in particular is held together by circulation of money. When the times were good—or perceived to be good, people earned money and spend them faster than they could earn them. This spending creates a boom, other people get the money that is spent and then they go out and spend more of it. The spiral keeps going up and away. Yet another number called the “Consumer Confidence Index” measures this exuberance. This is an index that ranges from –100 to +100. In January 2000 consumer confidence was at 38, 2 months back it was 23 and now it is 13.

When consumers get spooked the economy runs scared. If John’s neighbor looses his job, John decides to be careful. John’s family stops eating out, stops buying useless gifts, starts postponing larger purchases and suddenly this create a ripple effect. John’s frugality causes the service industry to earn less money, leading to more job cuts, leading to more panic. The predictions of doom and gloom, leads to doom and gloom. This is called a self-fulfilling prophecy, which is one of the most dangerous things in the capitalist economy.

Luckily, the reality is not quite as bad. Even though there have been job cuts and market shrinkage, in reality this is a small perturbation and with some luck it will stay small. In some sense the numbers lie.

“Let's try Geography. London is the capital of Paris, and Paris is the capital of Rome, and Rome--no,”

It was Sunday morning, on the 22^nd of April, and I was at the airport to catch a flight to Portland, Oregon, near Mt. Hood. Sunday morning is a special day. For families it is family time. For single people it is personal time. People who are pious are in Church. People who are not, are generally in bed sleeping off the weariness of a week’s worth of work and nursing the hangovers of partying on Saturday. Some are out doing things with their children. The chronic shoppers are very busy putting on their Sunday worst to go shopping (the shops open at 10 am). Really, no one should be at the airport at 9 am on a Sunday. So, I went there smugly, hoping for a quick check-in and a seat on an empty flight.

Hordes of people were milling around the check in counters. Every one of the many lines had about a 100 people, looking bored. The boarding gates were spilling over. The airplane was crowded. Where did these souls come from, on a serene and bright Sunday morning? Probably from the same place as I. They need to get there from here. Be it on business or vacation or whim. Maybe they forgot the stock market was shivering, a cold wind was blowing through the economy, and they should be at home, worrying about the future.

“The first thing I've got to do,” said Alice to herself, as she wandered about in the wood, “is to grow to my right size again”.

As the overcrowded plane left the tarmac, creaking at the seams, I thought of the scene at the airport. For once, the normally infuriating crowd, cheered me up. It spoke loud and clear that the sky is still up there, and people are going about doing what they need to. The gloom of the numbers may just be a hiccup in the rush to the new economy, a correction, a reorganization and a bump in the road.

Partha Dasgupta is on the faculty of the Computer Science and Engineering Department at Arizona State University in Tempe. His specializations are in the areas of Operating Systems, Cryptography and Networking. His homepage is at http://cactus.eas.asu.edu/partha.