- The Dow Jones’ new high is a numeric illusion
- The Personal Savings Rate is at the same level it was during the last recession
- Economic growth (GDP) is lower than inflation growth (i.e., the economy is not growing)
- Even after adjusting for inflation, cost of living is 17% higher than it was in 2000
The article The real economy caused quite a stir, and I am happy that it opened way to some healthy discussion. Some interpreted the analysis by saying “The current stock market is crashing“. I think that’s an extreme point of view, and I don not quite share it. I do think that when presidential pre-candidates utter words like “the market seems to be doing well” they are just ignoring a reality of this market, this market is still 8% below the top of 2000 adjusted for inflation, and that using official inflation data.
Some readers did not find to their liking that I was using a commodities standard to measure the value of the dollar. To them I have two answers:
- Sorry, but you cannot measure the value of money independently of its purchase power. And although it is true that we don’t spend our money as individuals in commodities, the economy as a whole does.
If you ignore the fact that the dollar is losing its purchasing power, not only externally but also internally, you cannot explain why we are running the current deficits at a national and individual level. Individual level you say? Yes. The current Personal Savings Rate is at the same level as it was during the mist of the last recession.
What this means is that the increase in home prices, stock prices, and assets in general, is not translating into an increase of savings. This means that we are either getting richer and spending all the money just for the heck of it, or that we are not being able to save because we need to spend more to support our standard of life. My contention is that what is happening is the latter. Do I think so because I don’t want to admit we are living in a wonderful economy? The answer is no. I would much prefer the economy is great no matter who is in office and that it is really good, not only good enough to keep the illusion going.
I think so because the Official Numbers for Real Personal Consumption Expenditures show that we are spending 17% (in adjusted dollars) more for the same products. Now, you need to understand, these are “chained dollars“: after adjusting for inflation, we are spending 17% more, not less for the same goods. This means that even if salaries kept pace with inflation (which they did not) our work would be 17% less valuable than it was in 2000.
Furthermore, the increase on GDP from 2Q 2000 to 2Q 2007 was 15% while the official inflation rate was 19.95% (2001-Aug 2007). Compared with the year 2000, the economy is worse by 4%, and that is based on Government Figures.
- The mentioned Official Inflation rate accounts for the so-called hedonic adjustments and “reweighing”, which account for the better stuff we get now for the same price we paid before for stuff of less quality (which affects only certain industries, mostly technology).
Even with the adjustments for DVD players and other useless stuff, official figures show that the economy has not improved compared to the year 2000, the stock market is more overvalued than in 2000, the actual value of the stock market is lower than the top of 2000, and our work is worth less than it was in 2000.
Franklin @ October 11, 2007