Down went markets yesterday.  Up went the price of oil.     

It was a day of carnage.  A day when shares in the world’s largest automobile maker fell to their lowest level in 33 years.    A day when Libya said there was too much oil in supply and it was to CUT production.    A day when the Bank of England governor Mervyn King called for us all to “face up to reality,” and said he had no idea how much house prices were going to fall.    In banking land, Tim Bond, chief equity strategist at Barclays Capital said: “We are going into tortoise mood and are retreating into our shell.”

But here is the strangest comment of the day.  On the BBC web site it was said: “Some analysts believe a bear market, in which shares fall for a prolonged period, has already taken hold.”

It’s just words:  correction, bear market, crash.  A correction is defined as when shares fall by more than 10 per cent.  A bear market, when shares are more than 20 per cent down from a recent high.  A crash is normally considered to have occurred when prices are more than 30 per cent down.

But the truth is this.  The bear market began at the end of the last century.   At close of play last night the FTSE was 1,400 points, or 20 per cent, lower than the level it stood at on the 31 December 1999.

Not only did the Dow fall by 358 points yesterday, the second-biggest daily fall in this year of extraordinary volatility, not only did it fall to the lowest level in 21 months, but the Dow also fell below the Dotcom boom peak of 11,722 set on 14 January 2000. 

In other words, both the FTSE 100 and Dow Jones Industrial average are below levels set eight years ago.

This is no new bear market, it is the continuation of an old one.

But we were fooled into believing it had ended, we were fooled by the most transitory of illusions, rising house prices.

Some idiots have laughed off the dotcom crash and said prices just got out of hand; and described the housing boom as a proper boom based on solid fundamentals.

This analysis was wrong.

The dotcom boom promoted innovation.  And it’s the innovation sparked off during that period which gives the best hope for today.

Robert Solow, a famous Nobel prize winning economist, credited as being one of the leaders in the theory of economic growth, once said: “Technology is everywhere but in productivity.”  In other words, we had witnessed a period of dramatic change in technology, but it was not being shown up in the productivity statistics.    Mr Solow was not wrong, but he seemed to have failed to grasp the time lags involved.    The boom of the late 1990s, which took place many years after Solow’s observation, was down to technological innovation finally showing up in the productivity data.  

And that’s what it all boils down to.  Productivity is what creates wealth.    The comings and goings of economic cycles, or bull and bear markets, are like whispers on the wind.    Prosperity is down to how much we produce, and how much we produce is determined by innovation.

The last few years have seen countries such as India and China piggy back on innovation that had already occurred.    The next few years will see the recent strides made in technology filter through into genuine wealth creation.

But right now, we are simply in the midst of an economic period that began when dotcoms crashed. 

© Investment & Business News 2013