The Dow & The Dollar
Last week, our own Richard Ross had a sobering and, well, downright scary post regarding the U.S. dollar. Well, I’ve come across some interesting information which puts this into further perspective.
In a piece in Smart Money magazine, investor Jonathan Hoenig uses the example of Zimbabwe’s economy to explain how a declining currency can render stock market gains meaningless.
From May through October of 2008, Zimbabwean stocks skyrocketed, shooting from 72,000 to almost 400,000 by early November as measured by the S&P/International Finance Zimbabwe Index. For intrepid investors with a world bent, it would appear to be an attractive return of roughly 5,300%.
The only problem is that, while investors had indeed earned more Zimbabwe dollars, the value of those dollars over the same period had nearly evaporated amid the country’s hyperinflation, meaning the “return” was actually a catastrophic loss. One Zimbabwe dollar in May of 2008 had lost 99.99% of its purchasing power by November of that same year. Investors made thousands of percent in stocks and were still wiped out.
We wrote about the specter of government-caused inflation earlier this summer. Since that time, the stock market has soared even as the value of our own currency has collapsed to 14-month lows, a Dow/dollar relationship we also highlighted a few months back.
I’m as delighted as anybody to see the Dow crossing 10,000 and now up sharply for the year. What proponents of increased government stimulus and intervention need to understand is that however, as the saying goes, “there is no such thing as a free lunch.” Since March, US investors have earned more and more of an increasingly devalued currency — stocks have risen 60% as the dollar has dropped about 15%.
That devaluation is a reality born in Washington, D.C., not from speculators on Wall Street, and exactly the reason why gold continues to knock up against all-time-highs. Official estimates are for the U.S. federal debt to reach $23 trillion by 2019, nearly double current levels. By 2011, the debt and will account for 100% of our GDP.
What does rampant inflation look like? In 2008, the Los Angeles Times reported how a beer in the Zimbabwe capital that cost 100 billion Zimbabwe dollars on July 4 had already risen to 150 billion an hour later. A few months after that, Zimbabwe issued the 100 trillion-dollar banknote, then worth about $30 (U.S.). Apart from being a collector’s item, it’s now completely worthless altogether.
In 1980, the Zimbabwe dollar was actually worth more than the U.S. dollar. What deteriorated over those 29 years wasn’t the weather or the water, but the political philosophy. Once known as Africa’s breadbasket, government destroyed the currency to the point where even “billionaires” were starving in the street.
The point is that having more dollars isn’t the same as having more wealth. As our own government continues to expand the money supply and further intervene in private markets, here’s hoping they understand that basic but essential distinction before we learn the lesson it’s too late for Zimbabwe to correct.
Obama supporters will no doubt begin pointing to the Dow resurgence as evidence that the economy is rebounding. When they do so, be sure to use this evidence to refute them.
More importantly, though, so long as this administration continues to pile up debt and pursue their statist/socialist agenda, our nation’s future prosperity will be in serious jeopardy.
{UPDATE} Larry Kudlow also has a similar article out today which I recommend reading: Storm Clouds Gather as Dow Hits 10,000
Cross-posted at Conservatives with Attitude!
