Dan Martin
PPJ Staff Writer
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“Dow hits record high as markets are undaunted by tepid economic growth, political gridlock” (The Washington Post, March 5, 2013)
This is just an example of the headlines appearing in virtually every newspaper and on every newscast in
the country.
Feel better now?
Well, I hate to burst your bubble (that’s one of those highly technical economic terms bandied about by the talking heads), but let’s take a closer look at the numbers.
The common thread here is that all of these headlines trumpet a mindset that is pure horse (manure). (Editor’s note: The writer actually used a stronger epithet and, while we do not pretend to be rated G, there is always the outside chance the PPJG will be left lying about where a nine-year-old might find it.)
Anyone who respects the ‘time value of money’, also known as ‘inflation / deflation’, is conditioned to immediately suspect comparisons of dollar amounts between different time frames, and treat them with a huge dollop of skepticism.
THE REAL NUMBERS
The closing numbers for today (March 5, 2013) were $14,253.77 for the Dow and $3,224.13 for the NASDAQ.
The average annual inflation rate from 2000 to 2013 is 2.24%. The rate from 2007 to 2013 is 1.945% (see InflationData.com.)
Adjusted for inflation, the Dow Jones Industrial Average (DJIA) is $1,479.47, or 9.403% short of its all time high of $14,164.53 on October 9, 2007 ($15,733.24 in today’s dollar.)
The NASDAQ is even more woefully behind its March 10, 2000, record close of $5,048.62; ($6,751.24 after adjusting for inflation.) That would be $3,527.11 – short 52.244%.
WHAT DOES IT ALL MEAN!
Inflation is a basic characteristic of our economy. Those who wield some influence over these things strive to maintain the inflation rate between 0.5 and 1.5 percent as measured by the price index for personal consumption expenditures (the PCE price index).
Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression.
The fact of inflation must be taken into account whenever and for whatever reason we are comparing the cost of things between two different time periods.
Obviously, we have a way to go.
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Dan Martin: procentral@mainstreetcom.com A semi-retired estate planner and tax preparer, determined to help people understand how numbers affect every day of their lives. Comments, questions, or clarifications are welcomed.
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