The Tao of Dow

This may be more important to Election 2004 than just about anything else:

Dow Passes 10,000 As Stocks Keep Rallying

Wall Street reached one of the most significant milestones of its recovery from the bear market Tuesday, as the Dow Jones industrials crossed 10,000 for the first time in 18 months.
Stocks moved higher as upbeat investors picked up shares on bets the Federal Reserve (news - web sites) will keep interest rates low for some time.

The index of 30 blue chip stocks moved past the milestone shortly after trading began. It was the first time since May 31, 2002 that the Dow had been above 10,000, and marked a solid comeback from the five-year low of 7,286.27 the Dow fell to on Oct. 9, 2002.

Comments

[Mark Fox]

The US can print money to buy back debt, which John Law couldn't. Ideally, we have to carry the debt for a long time and "grow into" the money supply. To print and pay quickly tends to erode confidence in the currency and accelerates devaluation, requiring even more printing (Argentina, etc...) We can carry the debt, because we're still the biggest stablest player in the world economy.

Imagine the plight of an American who did not invest in the S&P500. He doesn't get the artificial 27%, or even the real 5%. But his future income is still devalued by that 27%. He either has to remain blissfully unaware, or hope that the Gnomes are truly geniuses who can extend the debt gently.

[Kevin Carson]

mak_nas,

I haven't been to Lew Rockwell yet today. It'll be interesting to see if Gary North has anything to say about this. It's the kind of thing that Austrians get really exercised about.

[Warren]

Remember when the GOP used to talk about being the fiscally responsible party? Now that they've been given the opportunity, they have replaced the, tax and spend party, with the, spend and spend party. The only question is if the inevitable recession will hit before next year's election? It's possible they might even be able to keep the party going on printed money till 2006. But there won't be a 'soft landing' for the one that's coming, the longer it takes to get here, the harder we're all going to get fucked.

[mak_nas]

the interesting part of this boom to me is the reckless expansion of money supply that underlies it. the dollar continues to set new lows against a basket of foreign currencies, and this devaluation has a naturally inflationary effect -- in terms of purchasing power, as the dollar collapses all things dollar denominated should inflate.

an american invested in the S&P 500, for instance, has seen a 27% gain since the october 1, 2002. but a european investor, having to contend with the dollar's fall, has seen something less than 5% -- no rally at all.

how long can such an inflationary wealth effect go on? ask john law.

[mak_nas]

it also is worth noting that the expansion in money supply can be managed, but not entirely controlled, by the fed. despite continuing low interest rates, money supply has begun to contract in the last two months as banks start to get more cautious about lending into the debt boom.

[joe]

If I can't get a good answer to this question here, I'm stuck. We have very low inflation, a huge deficit, and either a static or contracting money supply. Why not print money to pay off the debt - ie, buy back those T bills with fiat dollars? Is it all about setting a bad precedent, or is there some actual harm I'm missing?

[Brad S]

joe - that would lead to inflation, which is what we're going to see when we have to start paying off all of this debt anyway. Basically, if you increase the current money supply, the value of each incremental dollar of current money goes down (i.e. inflation).

[joe]

Yeah, but inflation is already low. Some sources are worried about deflation. Given the low inflation, and the high deficits, doesn't the calculus change?

[mak_nas]

the low inflation is a temporary, and it will change soon as a result of what we're talking about here. the fed, back in november, killed any notion of deflation in bernanke's (now famous) "printing press" comments. essentially, they have decided to destroy the dollar to offset any possibility of economic contraction.

Why not print money to pay off the debt - ie, buy back those T bills with fiat dollars? Is it all about setting a bad precedent, or is there some actual harm I'm missing?

the harm is carefully articulated in historical accounts of john law's mississippi scheme. it seems at first like a painless solution to rampant public debt -- but it isn't.

[Douglas Fletcher]

I think it was called Argentina for a while.

[mak_nas]

the frightening part is that the capital flight that would ensue in such a scenario just might maybe already have started. europe was a net seller of dollar-denominated assets last month. of course, i'm speculating -- that trend could reverse next month. but the weakening dollar is a hornet's nest of unintended consequences.

[joe]

Thank you, Mark. Even beyond the inflationary aspects, it will discourage people from converting to dollars.

Got it.

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