Federal Reserve

Inflation Makes Everything Worse Than It Looks


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.

NEXT: Reason.tv: Worst. Decade. Ever.

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  1. Oh, don't worry. Inflation's coming alright. I don't see anybody high up in government who thinks the value of the dollar is something worth protecting.

    1. It's worse than just indifference to inflation. Most leftists actually want to encourage inflation to help debtors out and stick it to the greedy lenders. They try to avoid saying it explicitly, of course, but it's pretty clear if you read their literature carefully.

      1. "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."
        -Vladimir Lenin

        1. Without the bourgeoisie all that remains are the peasants and the ruling class.

          1. Or the slaves and their masters.

    2. I hope not, but if it does another book prediction of mine will come true.

  2. What Thelonious said. They are doing nothing to avert the problem and everything they can to bring it on.

  3. Ha! I knew it. I put all my money into CDs for years. Got a real nice KMFDM collection.

    1. What an extremely random thing to say. I also have a nice KMFDM collection.

    2. But how is your MDFMK collection?

    3. Hey, me too! You can get a lot of their stuff pretty cheap at used CD stores these days.

      Blitz was pretty disappointing, though. I think KMFDM may be a bit past their prime nowadays.

  4. Ha! I knew it. I put all my money into CDs for years. Got a real nice KMFDM collection.

    1. Lots of that going around on this thread. I sear I saw someone say the same thing just a moment ago.

      1. Yeah, but do you have any Killing Joke?

  5. to be fair, this analysis ignores dividends, so tack on 2-3 percent annual and compound

  6. What percentage of people owning stocks, either individually or thru mutual funds, actually are earning 2-3 percent dividends regularly? This is not a snide question, I don't know and am right now not spending much time trying to dig up the answer, but would be interested if you could point me to a source on this.

    1. well if youa re going to use the DOW which is an average index, you have to use the DOW dividend yield... According to wikipedia...

      "Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows)."

      Dividend yields used to be higher, but because we have changed the tax code in recent decades to favor capital gains over dividends, more companies now use extra cash to buy back shares rather than pay our larger dividends... but still the DOW yields dividends usually int he 3-4 percent range as of late.


      Also larger stocks (ie the DOW) usually pay larger dividends than smaller firms (which on average have higher capital gains)

      1. heres a chart of current dividend yields by firm in the DOW as of the beginning of 2009


        1. Eb---Thanks much; I thought the move away from dividends you mention had been more substantial than it seems to be.

          1. It is. The S&P 500 hasnt held dividend levels as well as the Dow has, IIRC. Probably not as bad as what you thought, even then, but worse than the Dow.

  7. and this inlfation alalysis also shows why the real capital gains tax is much higher than 15 percent... the average over the past decade has been about 30 percent once you adjust for inflation.

  8. What's with the "inflation is coming" stuff?I don't recall many people trumpeting "Inflation is here!" during the earlier portion of the 21st century. The deflationary periods have been few and relatively brief since 1896.We're in one right now.
    Inflation has been with us for most of the last century.The Gov and central bank like it that way.

  9. SIV---people mean by "inflation is coming" a general CPI inflation substantially larger and more noticable than one that has plagued most newspaper readers for most of their adult lives, that is, sincee the early 1980s.

  10. 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....more than twenty dollars!

    Thats not quite right, Brian. It would be worth 20 1929-dollars. Which is a lot more 20 2009-dollars. If you inflation-adjust the rate, you also have to inflation adjust the return.

    1. Yes, but the rate of return is not affected by that. An investment that takes 80 years to double is a pretty poor one, especially when it's as risky as the stock market.

      1. What investment has a better inflation adjusted return with the same or less risk?

  11. I couldn't buy an iPod Touch in 1999 and I couldn't buy a Kindle in 1929, so I will take my inflated dollars today instead of then, thank you.

    1. John---You really don't see a causal link between price inflation and good new tech, do you? Trust me, we could have had the great tech anyway. This isn't a call for going back in time. It's a call for a currency that doesn't wither away in value as we try to save it.

      1. John---You really don't see a causal link between price inflation and good new tech, do you?

        Yes I do. Your snark decoder is broken again.

          1. Less than 127k in "inflation adjusted dollars.Throw in the hedonics and a Skyline GTR is practically FREE!

        1. John--Sorry; inflation is SERIOUS BUSINESS!!

          1. No problemo, I accept your kind but loud at the end apology.

  12. They refer not to typical inflation but to what economists call HSI (Holy Shit Inflation).

  13. I stuff my rubber woman with cash because the calories I expend inflating her by mouth cost twice as much.

    I tried saving up for an air job on New Year's Eve, but I lost forty-eight zeroes somewhere along the way, and I only have enough extra energy to stare intently at her head-hole and sweat a little.

    But next year, baby?squeet squeet squeet!

  14. So where is the smart money going? Serious question, because I'll actually be getting some soon and need to have some idea where to put it.

    1. I understand Ben Bernanke sends his to SugarFree.

      1. Thus showing that Bernanke is as retarded as we suspected. NutraSweet will merely blow your money on insulin, gratuitously large hamburgers, and transsexual midget hookers with harelips (NTTAWWT). Much like Bernanke would have anyway, which explains why he sends his money to NutraSweet.

        1. Don't forget that stuffed bear of his.

    2. Long-term or short-term?

      Right now, there's a lot of very sophisticated money engaged in the "dollar carry trade", a sophisticated way of shorting the dollar/profiting from its decline.

      Assuming that the dollar will resume its decline and that inflation/interest rates will go up:

      Big money moguls are moving money into various commodity complexes and into overseas markets.

      For domestic stocks, I would look at companies that are global and/or export oriented.

      I would stay the hell out of bonds - your principal is going to take a hell of a hit when rates start going up.

      1. I threw some of my 401k into international stocks a couple of years ago. Just to get a little more diversity.

        1. I'm not pumping my 401k dollars full force into international commodities and gold. I think inflation is as big of an issue as pretty much anyone here, but I also think that Glenn Beck pitching Gold on his show is a surefire sign of a bubble getting blown up. I plan on riding that bubble, oh ya.

          1. Funny how accidentally adding a negative suddenly makes your post sound backwards.

            1. I dunno. I think it adds to the surreal, zen-like flavor of Hit & Run.

    3. So where is the smart money going?

      Downloads of books in electronic format of course.

    4. "So where is the smart money going?"

      Campaign contributions.

  15. Smart money? Pay down debt; buy stuff.

    1. Debt free except for the main house (30 year fixed @ 4%). Vacation house is paid for.

      What stuff would I buy? I own a sedan, truck, convertible, motorcycle, every tool known to man (I even have the anal-probe that the aliens left behind...IN my behind).

      Should I get a boat?

      1. Always get a boat, dude. The new investment is whatever hot women like. And what we like is boats.

        1. Well, my wife is a hot woman, but she's a little leery of a boat because of the upkeep. Still, if it would help me score with OTHER women, she might go for it...

          1. Natalie Wood and Robert Wagoner were into boats.

            1. I'm on a boat.

      2. Buy GOLD!

        1. Gold boats! And gold-plated dogs!

          1. LOL,

            But seriously, I've considered getting a 50-70 footer and in a few years (when the boy is a teen), taking the family for an 8 month tour of the Med, living on the boat.

            How many kids get a chance like that in life? My wife and I sure didn't.

            1. Neither has my family. We'll come, too.

            2. 50-70 feet?

              Budget for a crew, then.

              1. Crew? We'll just slave out Pro Lib's family...

                1. Slaves count as crew. Crew with poor collective bargaining skills, but still--crew.

                  1. Only for space (they can sleep in the engine room); it's not like we need to feed them (they can fish or eat each other as they die off).

                2. I can continue working in corporate law or as a slave on a boat?

                  I'm thinking abut it.

                  1. And about it.

    2. Why not madly accumulate debt, if yr very likely going to be able to pay it off in dollars rapidly losing their value? Just make sure the interest rate isn't adjustable upward doesn't exceed your expected inflation.

      1. I thought about that, but it's a risk if inflation doesn't increase dramatically. Definitely avoid adjustable rates on anything.

        I'm still sitting in real estate and stocks and would love to know a better place to go. A risky option but one with a little more chance of a return is to get involved in some sort of small business opportunity.

        1. I've been thinking the small business/steady income route might be the way to go as well.

          1. There's always porn. As an investor, I mean.

            1. Which brings up some interesting ideas of it's own: If I get a business license and film it each time I bang a hooker, and make sure she signs a model release, are we a hooker and a john and in trouble with the law, or are we actors making a porn film that just never gets released...?

            2. I still don't get how anybody is making money off of something I find free (from home, not from work).

              1. Ad revenue from traffic and subscriptions, I imagine.


                Strictly legal, I'm sure. Never quite understood all of that myself.

                1. I keep forgetting to get into the webmaster programs for the ones we link to on the blog. But I am still not seeing why anybody buys any with all the free out there.

                  1. I have a buddy who has been involved in the porn business for a long time. The people buying subscriptions are into the weird shit, which would scare off people trolling for free. NMCF is one of the tamer ones. Last we chatted about it, he was getting involved in some pron with bodybuilder women.

      2. Before the hyperinflation arrives, deflation will grind anyone pursuing that strategy to a pulp.

    3. I think its always smart to owe as little as possible. Although borrowing now at all-time low rates that you can lock in may look pretty smart when rates go up.

      Assuming you can continue to pay the loan, of course.

  16. Slightly over 220 now-dollars, then....if the inflation calculator site I use is correct.

  17. It's distressing how often inflation is ignored. Back when I was studying Finance, we always worked in real dollars, adjusted for inflation, when making historical comparisons or in projecting future growth, earnings, what have you. Seemed pretty self-evident.

    However, if you read the media on such comparisons or forecasts, the odds are very high that inflation will be dropped. Given that inflation is usually 2-3% or more per year, that's a substantial oversight. Thus, raises this year averaging 2% aren't raises at all, Gone With the Wind is still, by a pretty fair margin, the highest grossing film of all time, etc.

    1. However, if you read the media on such comparisons or forecasts, the odds are very high that inflation will be dropped.

      And they would still be doing it even if math was still required in J-school.

      1. No doubt. One of the problems is that the media tends to simply report numbers that the sources (usually with vested interests of one kind or another) supply them. Hence, movies are constantly reported as the "biggest grossing film of all time", when that is, of course, complete bunk.

      2. What kind of Jew school doesn't teach math?

        1. Dude, he's talking about Jedi school.

          1. That explains why the Death Star was so underinsured.

            1. What would the reserve requirement be for an insurer covering stuff like the Death Star? A planet?

              1. Pretty low, I'd assume. It doesn't have any weaknesses that we should know about, right?

                1. True.

          2. Jedis know math already right?

    2. Really? When I studied finance (which was, umm, last spring), we adjusted projections of future earnings for the interest rate to look at its present value. In practice, its similar to adjusting for inflation, but its not quite the same thing.

      1. Anticipated inflation is either embedded in one of your variables, or you're ignoring it for educational purposes.

  18. I understood the original post to mean "20 dollars at 1929 value" without the asterisk qualifier. Interestingly enough, ten 1929 dollars would have bought half an ounce of gold. You need about 550 2009 dollars to do the same, well above the return.

    For the sake of sanity, here's a frequently-updated chart about the inflation-adjusted Dow here.

  19. Houses and lots, that's where I'm putting my money...worehouses and lots of whisky.

    1. Looks like I should put some aside to buy a preview button.

      1. 'Werehouses' would have been an awesome homophone/typo.

        1. Its roof was perfect.

          1. Invest in Trader Vic's.

  20. Inflation Makes Everything Worse Than It Looks

    There's a penis joke in there somewhere, but I just can't get a grip on it.

    1. Must be a really small penis joke if you can't even get a grip on it.

      1. Rub it a little ... it gets bigger

  21. Real GDP growth for a developed economy comes to about 1-2% per year. So the real return from investing in that economy is likely to comes out to be the same.
    1% for 80 years is 2.1 times the original investment, 2% is 4.7 times

    So a real doubling from the 1929 relative max to a 2009 mid-level is pretty much what I would expect.

  22. What I'm really worried about is that the government will eventually stick it to those of us who saw inflation coming and prepared for it - for example, by confiscating gold, or heavily taxing the income we get from holding stock in foreign companies, etc. Make their game the only game in town.

    1. Yeah, I did some rough math once and found that simple Treasury bills have been a pretty solid way to at least keep your cash value from shrinking postwar pretty reliably; and how convenient that the govt inflation machine makes LENDING THEM MONEY about the smartest thing you can do if security and not seeing yr savings dissipate is yr goal. Then there are the inflation adjusted govt lending options.

      1. except you then have to pay taxes on the interest in nominal terms, so unless you hold the bonds in tax sheltered accounts, you are losing money every year

        1. I did NOT include the taxes in my rough calculations, damn. I don't personally loan the govt money; treasury bill interest gets taxed the same as any other interest income, then? OK, it's worse than I thought. Damn you inflation!

  23. 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.
    Actually your best bet would have been to purchase $10 worth of uncirculated 1928 Peace dollars and put them in a sealed container and burying them in the back yard. Depending on condition they would now be worth $500 to $22,500 each or $5,000 to $225,000 total.

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