My Two Cents - "The 90-9 Rules"

4/20/2007

4PM is once again becoming the time for the dramatic pause. Will we or will we not make a new high in the DOW? With the paper gains once again showering down from the financial heavens it seems like a good time to put it all in perspective and see how all this newfound wealth will affect us.

Anyone watching the performance of the dollar in the world markets recently will understand this latest boom in stocks. The price of stocks isn't going up; the value of the dollar is going down, requiring that more dollars be used to buy stocks. Since the Dow Jones Industrial Average is not merely a number, but the dollar cost of the index, the falling value of the dollar will have a direct impact on the value of the index. Compare the increase in the DOW to the increase in the M3 monetary aggregate (yes Ben and Hank, we can still come up with it) and you'll see a nearly flat DOW. Meanwhile, the price of everything we need to live our lives continues to increase mercilessly. This blows out of the water the theory that investing in US stocks and mutual funds will protect you from inflation. Not only will these not protect you, but after you pay your capital gains taxes, you will be far behind the 8-ball. Add to that the impact of homegrown price increases that everyday consumers face and the recent increase of the Dow should be a footnote in the financial press rather than a headline. So goes the same for those who seek shelter in TIPS (Treasury Inflation Protected Securities). All of these theories are based on a flawed and grossly understated measure of inflation. By plotting your own expenses into broad categories such as food, energy, clothing, shelter etc, you can come up with your own family's CPI and then substitute that measure when making your investment decisions. This relatively simple method while adding little in the way of additional work can go a long way towards keeping you informed and hopefully ahead of the game as long as possible.

The fact of the matter is that the DOW, priced in the things we have to buy on a daily basis is actually going down. Only when it is priced in fiat dollars is the DOW going up and making new highs. Were we still on the gold standard, the DOW would not be making new highs. In fact it, along with the dollar, would have sunk a long time ago. By pricing the DOW in dollars of manipulated value, the illusion of growing wealth and value is created. Recognize that illusion and it becomes easier to adapt. Fail to recognize it and have your wealth incinerated.

Inflation and its evil twin the falling dollar have this nasty little habit of making bad look good, poor look rich and wrong look right. We fall into this trap again and again by continuing to think of our wealth only in terms of dollars as opposed to what that wealth will buy. Pundits on television and in the press will point to the current dollar weakness as a transient condition, a temporary weakness that is unlikely to persist in the long term. Plus, they'll add, the weak dollar will do wonders for our exports. While this last part is true, a weak dollar will also drive up the cost of imports, which consumers rely on heavily in the US. At times like these, I like to refer to my old stalwart, the 90-9 rule. 90 years of a falling dollar since the creation of the Federal Reserve System and $9 trillion in national debt. These two facts support my belief that not only will the dollar continue to fall, but that it is likely to do so at an ever-increasing rate.

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.