Federal Reserve

Inflation Makes Everything Worse Than It Looks

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The Wall Street Journal reminds us: inflation sucks…the life out of your investments:

Despite its 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at about 8200 and would have to rise another 28% or so to return to 1999 levels. Using today's dollars and starting at 10520.10, the Dow would have to surpass 13460 to get back to its 1999 level in real, inflation-adjusted terms.

Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either.

And that's in terms of dollars. How does the last decade or so of stocks look in terms of that once (and maybe future) money, gold?

In 1997, the Dow looked strong at 40 times the dollar value of an ounce of gold, notes John Hathaway, who oversees more than $5 billion at the Tocqueville Gold Fund at New York's Tocqueville Asset Management. With gold's rebound since 1999, the Dow now is worth about nine times an ounce of gold….

But don't worry about these little decade-long blips and bloopers, stock mavens: think of the long term. If you had bought in at the pre-1929 crash Dow peak with as little as ten dollars, your investment, inflation adjusted, would now be worth….oh gosh…

In inflation-adjusted terms, however, the Dow today is only a little over twice its 1929 peak, according to Ned Davis Research.

….more than twenty dollars!**

I blogged back in February on how inflation makes speculators of us all. In Reason magazine's January 2009 issue, we excerpted Robert Samuelson's book The Great Inflation and Its Aftermath, an excellent account of the rise and fall of the last age of visible destructive inflation in America, the late 1970s and early 1980s. And look out for the inflation that might be coming.

**That's $20 1929 dollars, as commenter Bergholt Stuttley Johnson reminds me, which means slightly more than $240 2007-dollars as per this inflation calculator; still, nothing to travel back in time for.