Dow nears 10-year low - International Herald Tribune

Dow nears 10-year low - International Herald Tribune: "Dow nears 10-year low"

Can someone tell me what this really means?

Back during the glory days of Clinton-Bush, I wrote about inflation in the stock market, what I might have called "investment inflation."

Ordinary inflation happens when there are too many dollars chasing too few goods. These goods, however, are tangibles. If a government prints money, then all prices will and should go up.

Investment inflation is the same thing, except for two differences. The first is that there may not be any tangible goods. Many of the "vehicles" developed by the stock market are intentionally insulated from tangible goods because, supposedly, this minimizes risk. However, minimizing apparent risk results in its own kind of inflation. If I can "safely invest" my money at some reasonable return rate, then it makes sense to leverage that investment. In effect, I would argue that the entire structure of our credit market .. world wide .. was at best an unsecured risk that encouraged an inflationary increase in investment capital.

The second difference between investment inflation and ordinary inflation, is that investment inflation has little effect on day to day purchases. Investment capital can grow hugely and may even decrease the cost of living by encouraging use of capital that makes money more efficient .. eg offshoring labor even when actual labor costs at home may be less. The result is the faux good times where costs remain constant but folks seem to have more money.

So what? If I am correct, then we have seen an implosion in investments but not a decrease in the underlying value of the economy. People still need cars and food, LCD TVs and cell phones.

As we burn of the inflationary investment capital, the value of invested money should come closer to the value of capital measured by its real productivity, if we can manage this descent without harming our underlying ability to produce and consume. In other words, the market will continue to fall until it reaches a level where the direct income from stocks .. that is the combination of dividends and increase in productivity of the investment, comes closer to its unleveraged values.

For most of us this may not be a bad thing. If we avoid ordinary inflation, our wealth will simply come closer to its real value without speculation. What happens if the purchasing power of real dollars starts to fail? We have seen this before, it was called stagflation.