The Dow Jones Industrial Average closed at 15,570 on Friday. Why is it so high? Are the corporations indeed worth that much more than they were 2 years ago? That depends on how you measure ‘worth’. To measure anything, you need a yardstick of some sort. A yardstick is a static measure – 36 inches has been the same 36 inches over the years. We measure the ‘worth’ of a company in dollars. Unfortunately, the dollar is not a static measurement.
If I purchased an item in 1913 for $100, what would it cost today? The government’s inflation calculator says it would cost nearly $2400! But this inflation calculator uses the Consumer Price Index (CPI) calculated by the federal Bureau of Labor Statistics (BLS), and this index is basically calculated in ways to mask the true inflation. For example, the ‘basket of goods’ on which prices were tracked in the Core CPI (used until 2012) excluded food and energy because these prices were ‘too volatile’. There are many different CP indices, but there’s a problem with all of them.
There’s an awesome website (www.shadowstats.com) that removes the crap from the government statistics. Shadowstats says the $100 item from 1913 would cost over $9500 today. Wow. Why did I choose 1913? That’s the year the Federal Reserve was created. One of the objectives of the Federal Reserve was STABLE PRICES. Great job, guys! Happy 100th birthday!
Inflation is the increase in prices of goods and services in the economy. This can be caused by supply shortages among other things. The creation of new money from thin air (by the Federal Reserve) also causes inflation. This is called the ‘quantity theory of money’, and there is wide agreement in economist circles that inflation is caused by a growth in the money supply. But who cares what a bunch of theoreticians say, it’s really just common sense. If there are a certain number of dollars available to purchase the available goods and services in an economy and, all of a sudden, the number of dollars is doubled, prices will adjust to accommodate the additional dollars. Of course, there will be some substitution effects (steak versus hamburger) and the prices of each good or service won’t double. But the general price level will indeed go up.
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