DOW 14000 Not Worth What It Used to Be
The Dow Jones Industrial Average, or the DOW, recently returned to its previous record high of 14000-plus last breached in October 2007, and the “happy days are here again” chorus broke out among mass media outlets. But with a base money supply that the Federal Reserve has pumped up from $850 billion in 2007 to more than $3 trillion today, DOW 14000 no longer means what it did five years ago.
Much of the inflationary impact of the flood of money pumped out by the central banks has been pushed into bonds, mortgage securities and stocks, seeking to repair busted bank balance sheets. Here is the DOW since the bear market began in 2000:
The effects shown above are caused by the dollar falling in purchasing power. As stocks and stock indexes (like the DOW) are measured in dollars, we can back-out the currency depreciation. One way is to use gold, as its stock is essentially fixed; another is to measure the loss of purchasing power by measuring the increase in dollar prices of commonly purchased goods, as the Consumer Price Index (CPI) does. We use the 1980 version ofContinue Reading →
The return of DOW 14000 is proof, among other things, that government treasuries’ and central banks’ attempts at behavior modification continue to work—in the short term.