1. » The real economy The Politics of Debt: Speak Up! Economic and Financial News for the Rest of Us October 8, 2007 @ 2:46 pm

    […] real economy Posted in October 8th, 2007 by TheBankruptcyNews in Uncategorized I wrote previously that in constant dollars the Dow Jones is far from a new high (actually, some 8%). Those constant […]

  2. Bigelow October 10, 2007 @ 8:53 am

    I find I need approximately $4400 today to equal the position I was in during 1960 when I had $1. In the strictest sense the only way to measure inflation is by how much money and credit there is now compared to how much there was earlier, i.e. “money”. The Federal Reserve Banks canceled the famous M3 measure of cash, credit, repos, etc because it was flawed some how. But, I use what I can get, so I looked up some graphs of M3 –actual M3, not rate of change– and compared 1960 to 2007; I used shadowstats’ recreation of M3 for 2007.

  3. TheBankruptcyNews October 13, 2007 @ 12:28 pm

    Thanks! It is true it is hard to figure out inflation without the M3 report.
    In a sense, trying to figure out inflation by means of price changes is at best an approximation because the commodities markets fluctuate in the short term due to market conditions and trading patterns. In the longer term though, I think they can work as a proxy to measuring purchasing power of a given currency and thus work as a measure of inflation.

  4. » Official Reports Confirm Economy Worst Than in 2000 The Politics of Debt: Speak Up! Economic and Financial News for the Rest of Us October 11, 2007 @ 12:01 pm

    […] The Dow Jones new highs is a numeric illusion […]

  5. » Dow Jones 400 to 600 more points of pain The Politics of Debt: Speak Up! Economic and Financial News for the Rest of Us October 22, 2007 @ 5:32 pm

    […] Is the Dow Jones at a new high? […]

  6. Whatever-ishere November 21, 2007 @ 8:18 pm

    thanks for the GREAT post! Very useful…

  7. steve "the debt settlement man" November 29, 2007 @ 9:36 pm

    For anyone looking to see the true evil of inflation buy the book “THe Creature from Jekyll ISland” great read big eye opener to the way money works.

  8. Raju March 29, 2010 @ 10:05 pm

    Inflation,an injurious entity. No one expect it & like it except businessmen.

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Is the Dow Jones at a new high?

Finance Comments (14)

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.

Franklin @ October 8, 2007

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