Two weeks ago I mentioned that current currencies have no inherent value, and I gave the dramatic example of the Argentine currency from the 70s to date. Today, I will comment on the myth of the new high for the Dow Jones Industrial Average, which is portrayed as an example of the economic health of the country.
In order to know if the Dow Jones is making new highs or not, you cannot compare it against another variable. Since the dollar has no inherent value, when you say that the Dow Jones hit 14,000, or any other number, it is completely meaningless. We can only price the dollar in terms of its purchasing power (comparing it against other currencies is meaningless as well).
The best way to compare the dollar would be to compare it against a portfolio of all the commodities available (not only against those whose prices went up, or those whose prices have gone down). The rationale behind this would be that such a portfolio would clearly show if the dollar has more, less or equal purchasing power than some time ago. This calculation, however, is tedious and I will not have time for now to create it, so I will have to go with a less than perfect measurement, inflation rate.
Inflation, in its most bland definition is “an increase in the price level of goods and services“. The increase of the price level can only be defined in terms of money, the amount of money needed to buy those goods. The inflation for a given period will be how much less purchasing power the money has for the consumer. For instance, 2% inflation a year means that the consumer needs to work 2% more to obtain the same goods and services as a year ago (unless he or she receives a salary increase of 2%).
So, how much purchase value has the dollar lost since the high in 2000? Well, using the data from this web site, it would be 21.82%. Shocking uh?
For this simple demonstration, I will consider (arbitrarily) that the value of one dollar from the year 2000 is 1, thus, one dollar from 2007 is 0.78. The sad result is that the current Dow Jones level (in year 2000 dollars terms) is 11,052. Hence, when the Dow Jones hit 11,908.5 in 2000 it was some 850 points higher than last week’s Dow Jones at 14,169. The news is even worse, because the CPI and the inflation index do not tell the whole story. In terms of gold, for instance, the Dow Jones price is 5500, or roughly a third of the nominal value. But, even considering the massaged inflation numbers, the Dow is 8% lower than in 2000, which tells you another story altogether about the purported health of the economy.
This article is part of the series "Documenting The Hyperinflationary Genesis"
- Bernanke’s creative solution: Let’s do it again
- At a financial crossroads
- How to survive hyperinflation
- Let the party begin. We will be dead tomorrow
- I have $ 100,000,000,000 and yet I can’t retire
- Is the Dow Jones at a new high?
- Stagflation: This Time It Is Different
- The Myth Of Gold as Inflation Hedge
- Is Gold a Hedge Against Excess Liquidity?
- Disposable Personal Income Shows Disturbing Historical Trend
- Things That Go Bump in the Night
- Greenspan: Give Homeowners Financial Aid: Financial News – Yahoo! Finance
- Black Swans, Bell Curves and Stagflation
- The Gold Scam
- And Now They Tell US
- Some Historical Perspective on the Current Recession
- Gold Correction Seems Over
- Gold Chatter
Franklin @ October 8, 2007