What an illuminating week for Wall Street — the Dow Jones Industrial Average has been bobbling just above and below the record high 14,000 mark, even as the country comes to grip with the reports that its economy has actually been slumping, with GDP shrinking 0.1 percent in the last quarter of 2012.
The Obama administration is trying to put a bright face on things — but the rest of us feel like we’re smoking more now and enjoying it less.
Well, guess what: While the Dow Jones Industrials have been edging past 14,000, the actual value of those stocks has been going down.
By this, I mean that if you take one share of each of the stocks in the Dow index, their combined value as measured in gold is lower than it used to be. The price in paper money may be going up, but the real value is slumping.
At about 14,000, the Dow Jones Industrial Average stands at nearly twice the 7,949 at which it stood on the day in January 2009 when President Obama first took the oath of office. But value of the stocks in the index has drifted downward; a portfolio of one share of each stock is worth only 8.3 ounces of gold, down from 9.3 ounces on Jan. 20, 2009.
There are those who will say that this is a trick, that no one measures things in ounces of gold anymore. Not since 1971, when President Richard Nixon finished taking America off the gold standard — which then still defined the dollar by law as a 35th of an ounce of gold.
Nixon’s move put us on a system of fiat money, in which the dollar isn’t backed by specie but nonetheless must be accepted in payment of debts.
Throughout history, though, people all over the world thought of gold and silver as the real money — and thinking of it that way can still be illuminating.
In his weekly radio address two years ago, the president spoke on soaring gasoline prices, saying there is “no silver bullet” to solve the problem.
It was a funny choice of words. It turns out that the value of gasoline — measured in ounces of silver (or gold) — hadn’t been going up at all. It had been going down.
In other words, it wasn’t the price of gasoline that was going up. It was the value of the United States dollar that was going down.
This is the part of the policy partnership of Barack Obama and Federal Reserve chief Ben Bernankethat no one likes to talk about. What it means is that there’s little joy on the street — Wall Street or (especially) Main Street — even in a week when the Dow Jones Industrial Average touches a historic high of 14,000.
Track the Dow in terms of gold, and you see what a collapse it’s been: The index was valued at 41.3 ounces of gold as recently as 2000.
Rep. Ron Paul is practically alone in Congress in paying attention to this warning. He confronted Bernanke with the question at a congressional hearing two years ago. The Fed chairman dodged by suggesting that consumers didn’t want to buy gold.
That was a funny argument to make at a time of soaring gold prices. And it’s a hard sell at a time when the Dow Jones average is at a historical high, yet the value of the stocks in it is slumping in terms of gold. Call it “the fiat Dow.”
It’s not just gadflies who are sounding these warnings. John Taylor, one of America’s savviest economists, argued in The Wall Street Journal this week that the Federal Reserve’s “quantitative easing” policy has not only failed to solve the economic problems in the country but has actually made things worse.
If you want to draw your own conclusions as to whether he’s right, track the value of your IRA or pension fund in terms of ounces of gold.
Lipsky@nysun.com
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