The Dow Jones Industrial Average crossed the 10,000 mark yesterday, and some people are hailing it as a psychological breakthrough. But 10,000 ain’t what it used to be, as a blogger named Tyler Durden explains:
On a real basis (not nominal) the Dow at 10,000 ten years ago is equivalent to 7,537 today! In other words, not only have we had a lost decade for all those who focus on the absolute flatness of the DJIA, but it is also a decade where the US Consumer has lost 25% of purchasing power from the perspective of stocks!
“Real basis” in this case means the dollar’s strength relative to the six currencies in the U.S. Dollar Index (euro, Japanese yen, British pound, Canadian dollar, Swedish kroner and Swiss franc). So we’re not talking about mere inflation, but our currency’s weakness.
Don’t get me wrong: I’d much rather have the Dow at 10,000 than at 7000. But Durden’s analysis points to the fact that our weak-dollar policy — the product of both “benign neglect” of the dollar under President Bush and the Federal Reserve’s quantitative easing this year — has a real effect on American investors and consumers. If you bought a mutual fund indexed to the Dow the last time it was at 10,000 and sold it now that it’s back at 10,000, you could say that you’d broken even in nominal terms. But you’d be able to buy 25 percent less with your money now than you could have when you bought the fund.
And things aren’t looking up for the dollar in the short term.
Tight money during the financial crisis of the late 1920s helped turn a recession into the Great Depression. Too much easy money for too long after the 2001 recession helped create our current predicament. We’re about to find out what extremely easy money — I’m not sure anyone truly knows how much money the Fed has created over the past year — leads to.