Dow Jones 14,000 is Economic Illusion Created By the Federal Reserve

Last Friday the Dow Jones closed above 14,000 for the first time in over five years. But it didn't last for long as the Dow lost 130 points on Monday to close at 13,880. Still, there is a lot of excitement out there and this is usually good news for investors. Some analysts suggest that this is a response to strong economic data. For example, the U.S. Department of Labor's payroll report revealed that the economy added 157,000 new jobs in January. In addition, the manufacturing index ISM hit 53.1 points (anything above 50 indicates an expansion in manufacturing activity).

I wish I could be that enthusiastic as well. But I’m not. The American economy exhibits strong fiscal intervention alongside ginormous and endless rounds of monetary expansion. Therefore, this new and ephemeral sugar high is just another illusion created from our good old Federal Reserve-borne inflation. When the Fed debases the currency and inflates the dollar, the Dow index (based on dollar prices) will naturally go up. The price of everything will go up! Or in other words, the value of the dollar will go down.

My personal take is that the Dow’s rally responds to an artificial boost aimed at aggregate spending, and is the consequence of a lender of last resort bailing out its friends in Wall Street. Of course, many analysts and experts will have you believe otherwise. So, why would you trust a poor graduate student from overseas? Well, you don’t have to, but I’m not alone on this one: Peter Schiff is probably the last non-biased investment adviser who warned about the subprime bubble years before it crashed. Schiff also believes that the Dow 14,000 is an Illusion Created by Inflation. He makes the case using the value of gold vis-a-vis the Dow 14,000 of 2007, under which it would have to double and even that wouldn’t be enough to catch up.

From this viewpoint, what we have today is simply a relative increase in the paper value of some stocks. And that’s not real wealth. Some may still argue that increasing the money supply is exactly what we need to get us out of the financial bust. Others would counter-argue that it merely buys some extra time, but it fuels a much larger bubble: the U.S. dollar (Paul versus Paul).

I have made my choice and I’m going to listen carefully to what the Austrian economists have to say here. Why? This is the only school of thought that could actually predict the latest financial meltdown to a tee. Meanwhile the Keynesian Fed and Wall Street remained out of the loop up until the day the bubble burst. The Austrians warned us long before the crisis and they continue to warn us today. Nevertheless, we still have to rely on the Keynesian intellectual elite who, by the way, never saw the crisis coming and suddenly today know better than everybody else how to run things. It is that Krugmanian pretense of knowledge what I’m worried about.

So, let me call upon some common sense here: Why would I trust a bunch of intellectuals that rely on Keynes’ original sin to forecast wonderful days before us, if they were not able to foresee, even for one second, the greatest housing bubble in history? The real danger comes precisely from this pretense of knowledge. This is exactly what cloud their minds from understanding which way the wind is blowing today and which way it will blow tomorrow.

In this video, Dr. Thomas Woods — New York Times best selling author — explains the risks of “Regime Uncertainty” and illustrates the negative effects of systemic price intervention. If the monetary authority keeps on stepping in, entrepreneurs cannot decide with confidence and certainty where to allocate their resources and thus, they hold back and markets can never clear. Messing up with the price system is misleading, dangerous and what is worse: makes us believe that we’ve already turned the corner, when in fact all it’s doing is “sowing the seeds of error.” According to Woods, with such interventionist path we are basically “kicking the can” and “giving the phony appearance of prosperity.” And since Woods — along with Schiff and the Austrians — predicted the crisis with such impressive precision, I will argue that, the Dow’s rally is simply another example of that short-ranged “phony appearance of prosperity.”

So, if I were to give an advice, I’d suggest looking at economic fundamentals first and foremost. Second, for a better word of advice try tuning in to Schiff’s radio show. And third, be curious, be very curious. Do your own research, and do never let the pretense of knowledge master your mind. Go make yourself a coffee, grab a comfortable chair, play your favorite music, and spend some quality time learning from those few who could actually forecast the recent financial meltdown. They are always barking online and the information is totally free. But if you still wish to give the stock market a greater chance, then I’d suggest checking not only the Dow Jones 30 index, but also the S&P 500 benchmark. Both have usually exhibited very similar behavior for decades, but they run fundamental differences in terms of understanding the drivers behind movements in the index.

But that’s for another article entirely.

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Remberto Latorre Artus

“It is clearly absurd to limit the term ‘education’ to a person’s formal schooling.” – Murray Rothbard <---> Born and raised in Chile, Remberto's academic influence was predominantly Monetarist, which was later contrasted with a strong Keynesian approach at the Universities of Vienna, Wroclaw and Central European University. However, substantive research, observation and curiosity for Human Action made Remberto neither a Monetarist nor a Keynesian, but an advocate of the "Austrian" Market Process Theory => Remberto has lived and worked in several continents as Teaching Assistant (Wright State Univ., Univ. of Desarrollo, Univ. Pacifico), Ski Instructor (Lake Tahoe, USA), Army Officer (Chile), Sales Assistant, and Micro Entrepreneur (Europe). Thus, life experience--and not formal schooling--made Remberto an advocate of "liberal" economic thought. On paper, Remberto is a graduate from a dual MA in Economic History and Global Studies. Remberto also holds a BA in Commercial Engineering from Universidad del Pacifico (Chile), a BA in Business Administration from Universidad del Desarrollo (Chile) and a BA from the Military Academy of Chile. Remberto currently works at the Austrian Economics Center and Hayek Institute in Vienna, Austria.

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