Thursday, November 04, 2010

Are stocks really up?

The Drudge Report has two headlines next to each other: 1) "Stocks Rock" and 2) Oil Hits Six Month Peak on Falling Dollar.

So, the stock market is up, and so is price inflation. The implication of the first is that the economy is coming back, the implication of the second is that the economy is getting worse. The problem is that stocks are not really up. The recession is not really over.  It's an illusion based on numerical manipulation.

The stock market is measured in dollars. Dollars do not remain steady as a unit of measure, like pounds or gallons. Dollars may be driven up or down in value as a unit of measure (and since 1913, they have only be driven down). The fact that prices are going up (such as oil) indicate that the dollar is indeed down. This is confirmed by looking at the dollar index, which measures the dollar against world currencies. The dollar index right now is as low as it has been in a year, and it is within two points of being as low as it has ever been since the dollar index has been tracked.

In fact, the dollar is being deliberately manipulated by the Federal Reserve to debase and devalue it - and the Fed has just ordered up a fresh round of "quantitative easing" (inflation).  The theory behind this risky and desperate action is, at least in part, that a cheap dollar will make people borrow, and when they borrow, they will spend - which "gets the economy going."  This is the theory behind the Bush-Obama stimulus plans - and it is an outgrowth of the economics of John Maynard Keynes.

Opposing Keynes and Keynsian Economics is another school of thought known as Austrian Economics - the economics of Nobel prize-winning F.A. Hayek and others including economist Ludwig von Mises.  Unlike the floating dollar, Austrian economics seeks a dollar that is stable: "sound" currency, like what we had when the dollar was pegged to the price of gold.  Austrian Economics advocates an honest view of the market by providing a stable measure - like the pound or gallon - which are not permitted to be manipulated by the government or by private bankers - who then can make economic decisions that benefit themselves and actually harm the economy of the nation.

Imagine how difficult it would be to compare prices in grocery stores if the scales were permitted to be changed every day.  A pound of salami this month might be a half pound next month, a gallon of milk at Winn Dixie today might be a half gallon at WalMart tomorrow.  And imagine if the rate of change could be very sudden and without warning.  Who could make economic decisions in such an environment?  But of course, some people would be able to benefit from inside information and cash in on the manipulation.

Moden Austrian economists are the only ones who predicted the current economic crisis caused by a Keynsian "bubble" of debt.  Unfortunately, Washington, DC is laden with Keysians - as that school of thought dominates both major parties.

For an unconventional (and yet clever and entertaining) comparison between these two schools of thought, click here.  And if you enjoyed that, you can see the sequel here.  And if you understand the term "Keysian" - you might find the following video amusing.

But back to today's stock market.  The Dow is indeed "up" (right now) by 187 points today.  That's a gain of 1.67%.  But then again, that's measured in variable dollars.  So, what is the real value of the Dow right now?  Well, gold is up more than $40 today - a gain of 3%.  So, measured in dollars, the Dow is "up" about a percent and a half.  But measured against a stable measure, the Dow is actually down about a percentage and a half.  So, you might have more dollars today, but you have actually lost wealth.

Granted, the trend could reverse tomorrow, but the long haul - especially since the latest crash of 2008 - is consistent.  The dollar is collapsing, and anything measured in dollars has to take this into consideration.

Moreover, how is the rest of the world doing today?  The European exchanges (FTSC 100, the DAX, and the CAC 40) are all outperforming the Dow (though they are also lagging behind gold).  So, the United States market is actually losing ground in the world market.  On the whole, Asia is doing about the same as the U.S., mainly because China's currency is artificially pegged to the U.S. dollar.  We all know what will happen if that peg gets pulled - the yuan will soar and the dollar will fall like a rock.  China must be careful, since China holds a lot of dollars in reserve.  No doubt, the Chinese are biding their time, just waiting for the best moment to pull the rug out from under the dollar.  The Chinese have given us a credit card (so that we can buy Chinese goods), and we have run it up past the limit.  Our Federal Reserve has determined the best solution to this extreme debt is to borrow even more money to pay off our debts - and if we lower the value of the dollar in the process, it meas we can pay off those debts with dollars worth less and less.

China and the United States are locked into an economic tango with each other, the dance of debt-buyer and debtor-seller.  They loan, we borrow.  They sell, we buy.  We want to borrow to pay our debts and further fuel our overextended lifestyle, and they want to make money off of us and yet avoid holding the bag when our money becomes worthless.  Both stand to lose, but China is the one paying the band.  They will say when the dance ends.

Of course, the current policy may be a good slight of hand to benefit the government and the banks in the short term, but it also means that those of us who must earn, save, and spend dollars over the course of our lives are being ripped off.  The money supply is being inflated and each dollar in your pocket is worth less.  Inflation is the ultimate taxation without representation.  And it discourages thrift, saving, and investment.

And inflation also inflates the stock market, and that makes us feel good - maybe even good enough to run up our credit cards.  Bubbles always pop.  I really believe we are headed for a big one.  If you'd like to learn more about Austrian Economics and what you can do to protect yourself, here are some resources:

Remember, for the most part, both major political parties are completely Keysian in their economic orientation.  It is up to us as Americans and as free people to educate ourselves and to demand that government adhere to the Constitution - which by the way, pegs the dollar to gold and/or silver - something we phased out during the period of 1913-1971, pushed by bankers who stand to gain by the manipulation and aided and abetted by politicians of both major parties seeking cheap capital for pet government projects.

The problem with debt is that it must be paid back - and with interest.  Whether you see debt as the poison or the cure depends on whether you hold to either Austrian or Keysian economics.

[Note: just a few minutes ago, Drudge added the following poignant headline with the other two: "Gold rallies to record high as Fed move feeds inflation fear."]


Rev. Eric J Brown said...

People don't have to imagine variation in the grocery store. They just need to check the amount of corn, peas, what have you, that they get per can - and then compare this to what shows up in old recipes from the 60s. That bottle of Pop will often be 16.9 oz or 14 instead of 20. The can of corn isn't a pound, it's 14.5 oz.

You pay the same, yet get less. This is what they are doing with the dollar... so you have to pay more to get the same.

Joe Greene said...

ZeroHedge reported today that the S&P 500 is down 29% this year when priced in silver.