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The Dow Is an Indicator of Price Inflation

Proponents of the Austrian School of Economics have been predicting that Obama’s lavish spending and Fed Chairman Ben Bernanke’s money printing through his various quantitative easing schemes would cause price inflation in our economy. For their part, Keynesians have been highly critical of Austrians for this prediction, claiming that current government fiscal and monetary policy will not lead to price inflation. They claim we have had four years of stimulus spending (however, not enough for their liking) and quantitative easing, yet if you look at the government numbers on price inflation prices are not rising.

Well, I suppose if you trust in government, as Keynesians do, you will follow its rigged statistics without asking questions. Over time the Bureau of Labor Statistics (BLS) has changed how its price inflation number is calculated. For a full review of how it has changed consult statistician John Williams’ site Shadow Government Statistics. Consistently, the BLS’s current calculating method has yielded a price inflation number averaging between two and three percent. However, if price inflation were still calculated the way it was before 1980, the price inflation average would be closer to ten percent. If it were calculated the way it was between 1980 and 1990, the number would be closer to six percent.

Comparing price inflation numbers of the 1970s with today is like comparing apples and oranges. Washington has changed the parameters of the measure; making a comparison useless unless, like John Williams, you calculate the number using the old formulas.

The same is true about the current euphoria over the Dow’s breaking of its all-time high. In nominal dollars the Dow is at an all-time high. But, what good is it if the value of the Dow has lost its purchasing power?

Let’s look at USDA retail price data for beef for example. Currently, the value of the Dow will buy 3,332 pounds of beef at the retail level. But at 14,500 points that is about 20 percent less beef than the Dow could buy in January 2000, when its level was at 10,600 points.

But, what’s that, you are a vegetarian so the increased price of beef doesn’t matter to you? Okay, well, the Dow’s value could currently purchase 15.35 tons of bananas. That sum would keep any troop of monkeys occupied for a while. But, it is the same amount of bananas the Dow could have purchased in February 2008 when it was only at 12,266 points and 60 percent less than in 1999 when the Dow was around 10,000 points.

And who could argue against the fact that the price of gasoline affects the prices of all other goods, and an increase thereof is the most harmful to the working class? Once again, price inflation can be seen by comparing the Dow’s current high with its previous value. At today’s current high value, the Dow could purchase 3,812 gallons of unleaded gasoline in the U.S. This is about the same amount it could have bought in January 2012 when the Dow was only worth 12,633 points. The short window of time, 15 months, is indicative of how price inflation does exist in a big way in our economy.

In the final analysis, Austrians are right and Keynesians are wrong. There is significant price inflation in our economy that is caused by Obama’s prolific spending and Bernanke’s reckless money printing. In fact, the numbers are indicative that price inflation has been with us for a lot longer time. When will Keynesians realize this? Perhaps they will when the BLS publishes a true price inflation statistic.

About Kenn Jacobine

  • Baronius

    The title of this article contains a greater insight than anything in this article.

    The Dow is an indicator of price inflation. We love it when there’s a price increase in things we own (stocks, housing), but inflation is inflation. Low interest rates make bonds a weak investment, so the more money we create, the more money goes into stocks.

  • Doug Hunter

    The inflation number is a running joke. Gas prices dipped very close to 1.00 in 2000 and again in 2002 (some local areas were below a dollar) now it’s 3.50+ in 13 years. Gold was under $300 an ounce in 2000, now it’s $1600. Even the lowly stamp has went from 33 cents to 46 cents so the dow would need to shoot ~40% past it’s peak to get there. Corn was $2.32 a bushel then, it hit $8.49 a bushel late last year and is still $7+. Examples of why the government numbers are utter bullshit abound, but most people aren’t as skeptical as I am and tend to believe what the so called authorities dictate.

    This is not about Obama, Bush was equally if not more guilty. This is about a society that now believes the government owes them food, clothing, shelter, retirement, child support, 17+ years of education, and healthcare, but at the same time do not want to pay any taxes to pay for those benefits. Granted, it’s separate groups that want the benefits and don’t want the taxes, but that’s the ugly compromise we get. In order for both sides to get what they want, a cradle to grave nanny state and extremely low tax rates something has to give. That “something” is a hidden tax known as inflation. World markets were shaken when it was suggested that a seizure of portions of bank deposits in Cyprus was in order. Really? That’s exactly what the government does when it prints money. It makes existing dollars worth less and the difference ends up in the hands of the government who printed the new dollars. At the same time, the government has driven down interest rates putting a double strain on people who hold on to dollars in savings. They can get next to nothing in interest but each year their dollar buys much less goods and services thanks to inflation… a double whammy that has destroyed the nest eggs of countless Americans… oh well, you can always turn your money over to stocks and Ken Lay, Bernie Madoff, et al. They have your best returns at heart… trust me.

  • Dug Hunter+

    The inflation number is a running joke. Gas prices dipped very close to 1.00 in 2000 and again in 2002 (some local areas were below a dollar) now it’s 3.50+ in 13 years. Gold was under $300 an ounce in 2000, now it’s $1600. Even the lowly stamp has went from 33 cents to 46 cents so the dow would need to shoot ~40% past it’s peak to get there. Corn was $2.32 a bushel then, it hit $8.49 a bushel late last year and is still $7+. Examples of why the government numbers are utter bullshit abound, but most people aren’t as skeptical as I am and tend to believe what the so called authorities dictate.

    This is not about Obama, Bush was equally if not more guilty. This is about a society that now believes the government owes them food, clothing, shelter, retirement, child support, 17+ years of education, and healthcare, but at the same time do not want to pay any taxes to pay for those benefits. Granted, it’s separate groups that want the benefits and don’t want the taxes, but that’s the ugly compromise we get. In order for both sides to get what they want, a cradle to grave nanny state and extremely low tax rates something has to give. That “something” is a hidden tax known as inflation. World markets were shaken when it was suggested that a seizure of portions of bank deposits in Cyprus was in order. Really? That’s exactly what the government does when it prints money. It makes existing dollars worth less and the difference ends up in the hands of the government who printed the new dollars. At the same time, the government has driven down interest rates putting a double strain on people who hold on to dollars in savings. They can get next to nothing in interest but each year their dollar buys much less goods and services thanks to inflation… a double whammy that has destroyed the nest eggs of countless Americans… oh well, you can always turn your money over to stocks and Ken Lay, Bernie Madoff, et al. They have your best returns at heart… trust me.

  • Dr Dreadful

    Doug, as I understand it, the inflation number is actually a measure of consumer prices, whereas a number of the things whose price increases over time you enumerated are commodities.

    My initial feeling was that your egregious examples must be outliers, and that the prices of most commodities haven’t actually changed that much over the last 12 years. However, a bit of research and some rough arithmetic told me that commodity prices have risen by an average of about 17% annually since 2000, and consumer retail prices by about 10% annually.

    You’re correct that no published inflation figures have been anything like that high. What strikes me, though, is the disparity between commodity and retail prices. As bad as the latter are, how are consumers being shielded from what would be annual increases in the order of 17% and in some cases as high as 30%? Something doesn’t add up here.

  • The Reaper

    #3

    It’s an interesting phenomenon and one that indeed doesn’t ‘add up’. I think some has been offset by technology, productivity, and efficiency gains (plus moving manufacturing of consumer products to low cost regions), some more has been returned to us in the form of government benefits that don’t show up on an income statement, and finally we’re simply not as comparably wealthy as a nation as we were 13 years ago… we’re finally starting to recede back to the mean.