The Dow Jones Industrial Average closed at 15,570 on Friday. Why is it so high? Are the corporations indeed worth that much more than they were 2 years ago? That depends on how you measure ‘worth’. To measure anything, you need a yardstick of some sort. A yardstick is a static measure – 36 inches has been the same 36 inches over the years. We measure the ‘worth’ of a company in dollars. Unfortunately, the dollar is not a static measurement.
If I purchased an item in 1913 for $100, what would it cost today? The government’s inflation calculator says it would cost nearly $2400! But this inflation calculator uses the Consumer Price Index (CPI) calculated by the federal Bureau of Labor Statistics (BLS), and this index is basically calculated in ways to mask the true inflation. For example, the ‘basket of goods’ on which prices were tracked in the Core CPI (used until 2012) excluded food and energy because these prices were ‘too volatile’. There are many different CP indices, but there’s a problem with all of them.
There’s an awesome website (www.shadowstats.com) that removes the crap from the government statistics. Shadowstats says the $100 item from 1913 would cost over $9500 today. Wow. Why did I choose 1913? That’s the year the Federal Reserve was created. One of the objectives of the Federal Reserve was STABLE PRICES. Great job, guys! Happy 100th birthday!
Inflation is the increase in prices of goods and services in the economy. This can be caused by supply shortages among other things. The creation of new money from thin air (by the Federal Reserve) also causes inflation. This is called the ‘quantity theory of money’, and there is wide agreement in economist circles that inflation is caused by a growth in the money supply. But who cares what a bunch of theoreticians say, it’s really just common sense. If there are a certain number of dollars available to purchase the available goods and services in an economy and, all of a sudden, the number of dollars is doubled, prices will adjust to accommodate the additional dollars. Of course, there will be some substitution effects (steak versus hamburger) and the prices of each good or service won’t double. But the general price level will indeed go up.
One hundred years ago everyone agreed that inflation was not good. That’s why STABLE PRICES was one of the objectives of the Federal Reserve. Then why is the Fed creating $85 billion in new money every month ($118 million per hour) if it is supposed to maintain stable prices? The answer relates to the nature of the Fed.
Who/what the hell is the Fed anyway? The Federal Reserve is privately owned, and its owners are private banks. So do the Fed’s actions benefit us little people on Main Street? Nope. Only those who get that new money directly from the Fed benefit. This is the banks and the Wall Street insiders. Those of us on Main Street will see higher prices for the goods we need. Most likely, our salaries will not go up to match the rise in consumer prices, leaving us less well off.
What if I own some shares of these stocks that are going up in value? Sure, that would benefit me. But the printing of money is creating a bubble, and all bubbles eventually burst (e.g. the dotcom and housing bubbles). If I could hold these stocks and then know when to get out (right before the bubble bursts), I would be in fine shape. Somehow I suspect those who run the big banks and those on Wall Street will know when to get out of the market before I do.
Of all the shares of corporations, only 34% are held by households. Ninety percent of corporate shares in the US are owned by 20% of the top income earners, according to The Tribune Review. So most of us probably don’t even own stocks unless they are in our retirement plans. And, most of us have very limited say about what our employer-run retirement plans invest in. When the bubble bursts, the value of our retirement plans will plummet. For those of us who do have control over our retirement plans’ investments, we will move out of risky equity investments as we get closer to retirement, and invest in things that are ‘closer to cash’. That won’t help us because the $200,000 we carefully saved for retirement will by that time buy us very little.
When you hear someone say the economy must be doing great, as the Dow Jones Industrial Average is reaching new highs, you can tell him he’s an uninformed idiot. Or a liberal sycophant (am I being redundant?). The Fed’s creation of money out of thin air benefits only the insiders on Wall Street and it harms us on Main Street.
Follow Gail on twitter: @AcctgProfTX
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