|
It is not inconceivable that were the dollar to fall, the stock market would rise (in nominal, not real, terms). The decline of the dollar would occur because of a decline in the demand of the dollar or an increase in the supply of the dollar, relative to other currencies. The dollar is likely to suffer on both these fronts.
The supply of the dollar has been increasing rapidly with Bush, his war, and his cronies in Congress. We are now over $8 trillion dollars in debt (not including future obligations). Other countries, unfortunately, also debase their currency, and also face future problems, which will likely result in much more debasing, like ours. Nevertheless, the supply of a currency tends to increase with the depravity of its government, and our government is now one of the most depraved of all time.
These supply concerns themselves, of course, decrease demand in the dollar. But there are other forces that also contribute. One is China, which is revaluing their currency; they will be buying less dollars in the future. Another regards oil, which is currently traded in dollars. In a few months, however, a new exchange will emerge where oil can be traded without dollars.
The outcome of this fall in the dollar will be that we will have to offer higher interest rates to foreigners in order for them to be willing to accept our dollar-denominated investments. In a market economy, higher interest rates would inhibit growth in the supply of money. But ours is not a market economy. The Fed can print money at will, and probably will. I would not be surprised if the Fed prints up dollars to buy long-term bonds. This will kill the dollar but keep our economy going. Eventually something bad will happen, like hyperinflation. Stocks, while becoming less desirable, can still increase in price if dollars become even less desirable.
This is sort-of what happens now. The value of the dollar decreases by half roughly every ten years. Look at a graph of M3, the broad money supply. This corresponds to a rate of inflation of about 7%. Price inflation does not mirror this rate exactly and evenly. Efficiency gains and free-market forces diminish the visible inflation rate (i.e. price inflation). Also, people overbid certain asset classes, such as stocks in the late 90s, or houses and bonds now. The "official" inflation rate, the CPI, excludes and limits these latter effects, resulting in an underestimated value. (Current home prices are not accurately reperesented in the CPI; nor were stocks a few years ago.) Politicians love this, as they can say the econmoy is better than it actaully is. But price inflation, even by the underestimating CPI, is still at 4%. I'm not sure how much of the 3% gap we should attribute to "good" efficiency/free-market gains and how much to "bad" manipulation, but we should at least be aware of the latter.
When you look at a chart of the stock market, I suggest you adjust it for inflation. The exact inflation rate to use at a given point in time is difficult to determine. Using the above current estimations, I would use a number between 4% and 7%. Perhaps you could make a band-chart: graph, first, the S&P discounted by the actual inflation of the monetary supply (now 7%) and, then, the S&P discounted by the reported CPI. In either case the graph will be below the one we see everyday (the nominal one). Note that the real chart lies somewhere in that band. Also note that the stock market was roughly flat this past year; this means that it lost about 7%. Inflation's a bitch.
The moral: 1. Gold is renown as a store of wealth. Buy some. You won't get rich (in real terms) but you wont' get poor, either. 2. Don't put dollars udner your mattress. They are not sure to retain their value. Gold is infinitely more desirable to serve this function; it supply is not arbitrarily manipulated. 3. Conservative foreign investments are not a bad idea; if the dollar falls, the value of these goes up (in dollar terms), excluding effects the falling-dollar itself has on the value of the investment. (The value of a business dependent on American buyers, with no alternative market, will be increase because dollars are worth less and decrease because Americans are poorer and will buy less of their products.) 4. Depending on how worried you are, you may want to learn to farm. I don't know how to now, nor do I have the land, but when I get out of school, my first investment will be a huge plot of good farmland, but not just beacuse I'm worried. I also favor that lifestyle.
|
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(1000+ posts)
Send PM |
Profile |
Ignore
