Chart shows stock market NOT setting records

Chart shows stock market NOT setting records

The following chart plots the Dow Jones Industrial Average against gold since 1978. This is important because gold is the only real money. Paper currencies are manipulated by central banks and governments. Remember what happened to the Zimbabwean dollar? How about Confederate dollars or Reichsmarks? All those currencies turned out to be worthless except as collectors’ items.

But if you held an ounce of gold in Alabama in 1864, or in Germany in 1944 or in Zimbabwe in 2010, you still could have bought a great deal of goods and services. And if your descendants still had that ounce today, it would be worth about $1,200.

Dow chart of the day, against gold, Dec. 4, 2013


Notice some things on the chart:

1. On the far left side, we see the tail end of the Nixon-Ford-Carter malaise economy, which struck after Nixon took the dollar off the gold standard in 1971.

2. The huge rise in the DJIA began in 1981, when two things happened. First, Fed Chairman Paul Volcker increased interest rates to kill off inflation. And he pegged gold — unofficially — at $350 an ounce, a price that held, despite fluctuations, until 2001. Second, President Reagan signed his tax cuts into law in 1981.

3. The DJIA stagnated, although it did not decline, in President Bill Clinton’s first term, 1993-96, when he increased taxes and tried but failed to impose Hillarycare, the precursor to Obamacare.

4. The DJIA went parabolic in 1996, when Clinton was running for re-election and signed into law Republican House Speaker Newt Gingrich’s capital gains tax cut. This turbocharged the already revving dot-com boom. Clinton and Gingrich soon produced the first budget surpluses in 30 years. Partisan “gridlock,” decried by most pundits, actually helps the economy.

5. The DJIA crashed after 9/11, not because of the attack, but because of the panicked responses to the attack by Fed Chairman Alan Greenspan, who goosed the currency, leading to the rise in the price of gold eventually to more than $1,000; and by “conservative” President Bush and the “conservative” Republican-run congresses of that era going on a wild spending binges, turning the Clinton-Gingrich surpluses into deficits — since piling up to the massive $17 trillion national debt. Bush also imposed massive new controls on businesses by signing the Sarbanes-Oxley bill, and the currency, banking and other controls in the USA PATRIOT Act.

Bush’s tax cuts, because temporary, didn’t help. And his TARP bailout after the Sept. 2008 panic hurt by grabbing money from Main Street and shifting it to Wall Street.

6. Taking office in 2009, President Obama continued the Bush spending binges, raising the deficits to more than $1 trillion during every year of his first term. He enjoyed a Democratic Congress during his first two years, which doubled down his spending. His spending included his own unstimulating stimulus of more than $700 billion in 2009, then Obamacare. He signed into law the Dodd-Frank hyper-regulation of business.

7. The far right side of the chart shows the DJIA rising against gold, but still way below its peak in the 2000-01 period. The ongoing recovery, such as it is, and the reduction of the deficits, albeit still well above $600 billion, also are occurring under gridlock, as the Republican House has clashed with the Democratic Senate backing the Democratic president.

10 comments

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  1. LetitCollapse
    LetitCollapse 4 December, 2013, 13:46

    Without all the off-the-balance-sheet QE and trillion dollar Wall Street bailouts today’s DOW would stand at about 1,500. Certainly not 16,000. There was no real growth pushing the DOW higher. It was But like I said before: FOR EVERY ACTION THERE IS A REACTION, FOR EVERY CAUSE AN EFFECT.

    You can’t drive the federal debt over $17T and then keep ZIRP (zero interet rate policy) in effect forever. Voluntarily or involuntarily, it must normalize (6.5%-7.5%) eventually. All you have to do is simple high school math and quantify on the back of an envelope with your pencil the debt service payments required at a normalized interest rate and what portion of the federal budget it will consume to identify the unintended consequences.

    My quess is that the interest rates won’t just normalized. They will Carterize (for those of you who remember the Carter years). That will be one of the future unintended consequences. And at that point, we’re done.

    They know this too. I don’t know something they don’t know. Why do you think they’ve spent trillions to build up the police state? Why do you think the US Constitution has been violated repeatedly in the last several years? Why do you think the POTUS is being allowed to use dictatorial powers? Why do you think the ‘will of the people’ has been routinely thwarted? Why are the ones who make the laws allowed to break the laws without apology?

    It’s really not that hard to figure out.

    Reply this comment
  2. Eric
    Eric 4 December, 2013, 18:30

    Ok, plotting Dow vs gold is a bit ridiculous given the boom and bust cycles in gold prices. I get that you want to paint the current in a negative light, but just plot in inflation adjusted dollars to make the same general point. At least that would have more credibility. The inflation adjusted price of gold has ranged over a factor of 5 since 2000, and this speculation element in gold prices is a huge disruption that just muddies the water of your argument. The recent spike is directly attributable to the very low T-bill yields that drove safety investors to gold as alternative. But what’s that got to do with your point??

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    • John Seiler
      John Seiler Author 4 December, 2013, 20:30

      Eric: It’s not gold that is booming and busting. Gold is the real money. Rather, it’s the dollar that’s booming and busting vs. gold.

      Reply this comment
    • Dyspeptic
      Dyspeptic 4 December, 2013, 22:42

      Low T-Bill yields DO NOT drive investors into gold because gold has no “yield”. Low bond yields drive investors into riskier investments like stocks. Gold is an entirely different kind of investment. It is a hedge against inflationary money printing and over time has shown a remarkable resilience in it’s value compared to paper currency.

      Your point about the inflation adjusted price of gold fluctuating by a factor of 5 is ridiculous and shows that you are clueless about gold’s function as an inflation hedge and store of value.

      The purpose of adjusting for inflation is to account for the decreased purchasing power of fiat currencies over time. Gold has no such problem and maintains a stable purchasing power over hundreds of years despite speculative activity, commodity trading and short term fluctuations in supply and demand.

      At any rate, John’s point was that all of the hype about all time stock market highs is over blown MSM propaganda. You don’t have to compare The Dow Jones Industrial Average to gold to see that. As has been pointed out here before a simple real dollar analysis shows that stock market indexes are still well off of previous records.

      Reply this comment
  3. Eric
    Eric 4 December, 2013, 18:32

    And another thing: compare to the S&P or some other relevant index. The DJI is a dinosaur of arbitrary origin that isn’t as relevant to the overall economy.

    Reply this comment
    • John Seiler
      John Seiler Author 4 December, 2013, 20:31

      That’s the chart that was prepared by Chart of the Day. But the S&P would show similar, albeit not exactly the same, trends.

      Reply this comment
  4. Eric
    Eric 4 December, 2013, 18:41

    For example, this is the kind of plot you should have used:

    http://www.crossingwallstreet.com/archives/2013/10/the-sp-500-matches-inflation-adjusted-high.html

    This supports some but not all of your points. To the extent that the rest aren’t supported, it’s because the world does not really revolve around gold.

    Reply this comment
    • Dyspeptic
      Dyspeptic 4 December, 2013, 22:49

      “the world does not really revolve around gold.”

      Correct. It revolves around an increasingly worthless piece of paper called The U.S. Dollar which The Fed creates by the trillions out of thin air. That is exactly the problem and also the explanation for the remarkable increase in gold prices in the last 10 years. Gold hasn’t gotten more valuable, the dollar has just gotten a lot less valuable. Just wait until the world dumps the almighty buck as a reserve currency.

      Reply this comment
  5. John Seiler
    John Seiler Author 4 December, 2013, 20:32

    Yes, the world does revolve around gold. You just have to look for it.

    Reply this comment
    • LetitCollapse
      LetitCollapse 4 December, 2013, 23:13

      I have an open mind and would be willing to go back to the GS if there weren’t so many inherent problems associated with it – from the risk of relinquishing domestic sovereignty to foreign producers…. to the need to convince our international neighbors to also adopt the gold GS (which would never happen since it stagnates growth)….to the fact that our gold reserves (as large as they are) wouldn’t come close to covering our $17T in federal debt (liabilities). If you review the era when the GS was intact it wasn’t exactly an era of economic stability. And when the economy goes south under a GS it’s incredibly difficult to correct.

      We just need to eliminate fraud and extortion as a common business practice under our current monetary system. We need to clean house. It would be easier to accomplish that, given the national will to do so, than it would be to implement a GS and make it work.

      Reply this comment

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