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The Dow Jones
Industrial average closed Friday at 13,264.62
- another record high.
According to CNN, Friday’s session made this the longest bull run
in 80 years. “The Dow has now risen in 23 of the last 26 sessions, marking its longest
bull run since the summer of 1927, when the indicator ended higher
in 24 of 27 sessions”, reported CNN. 1
As
investors cheer, it is worth noting that the numbers are not as
great as they sound. The Dow may be hitting new records, but believe
it or not, it has actually been a losing investment since the end of
the 1990s. Yes, that’s right. If you had invested your money in
the companies composing the Dow in 2000, your investments probably
gained in dollar terms but they have lost purchasing power.
Your investment dollars buy less today than they did in 2000. The
reason? Inflation.
The best way to measure
wealth is in terms of purchasing power, not dollars. One may have
more dollars, but if it takes significantly more of them to purchase
the same things, one cannot necessarily be considered wealthier.
Take for instance gasoline prices, which have doubled since 2000. 2
Unless the average American’s income has doubled over the last 7
years, it is a pretty safe bet that a larger percentage of the
monthly budget is going to gasoline. This is also true for other
expenses, such as housing, insurance, and food. Dollars just
aren’t going as far as they once did. If inflation is driving up
prices faster than wages, people are getting poorer because their
money is losing purchasing power. The main culprit behind inflation
today is the rapid expansion of the money supply by the Federal
Reserve. Every dollar added to the money supply devalues every other
dollar in circulation, and the money supply has nearly doubled in
just the last 10 years to nearly $10 trillion today.
3
With so much money
supply expansion, it is no surprise that inflation is seriously
eroding the purchasing power of the dollar. The Dow may be hitting
new records, but the picture looks significantly different when
inflation is taken into account.
Figure
1. Gold prices show that the Dow peaked around 2000 and has been
declining ever since. Dow represented by annual closing value.
Gold represented by annual London afternoon spot gold closing
price. Source: CNN Money
(Dow Jones Data) and www.onlygold.com
(Spot Gold Prices).
The best benchmark to measure
the impact of inflation is the price of gold. Anybody that watches
the price of gold knows that it has increased significantly over
recent years, climbing from about $270/oz at the end of 2000 to
nearly $700/oz today. This increase is not because gold has gained
in value, but because inflation has eroded the purchasing power of
the dollar. The value of gold is largely static; an ounce of gold
buys about the same basket of goods today that it did 100 years ago.
This remarkable stability is the reason it serves as a good
benchmark to measure the value of other things, such as the dollar
and investments denominated in dollars. Despite continually hitting
new records, gold prices show that the purchasing power of
investments in the Dow peaked around 2000 and have been declining
ever since. As Figure 1 shows, it took about 43 ounces of gold
to buy the Dow in 2000 and it only takes 19 ounces of gold to buy it
today.
The media can hype the record closings of
the Dow all they want, but the numbers speak for themselves. The Dow
may be worth more dollars than ever, but inflation shows a Dow
in decline.
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