The economy may be sluggish, and the deficits out of control, but you could never tell it from the stock market.
Thanks to Ben Bernanke, the markets are at all-time highs.
But before you pop the champagne, you should know that there's a big difference between "nominal" and "inflation-adjusted" numbers.
The nominal Dow is the figure investors see every day. In nominal terms the Dow is actually up 23% from its 2000 highs. But the truth is on an inflation-adjusted basis the "real" Dow is still down 11% from 2000 peaks.
That means in real terms investors are still poorer now even though the Dow is "up" over the last 13 years.
The reason for these illusory returns is inflation.
As Milton Friedman once wrote, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
It's simple: More dollars = higher prices. And it's not just in the price of oil or eggs. The same thing is true for assets including equities.
In fact, when you adjust the DOW for inflation over the last 100 years it produces an even more dramatic difference between what you see and what you get.
So what's the real value of the Dow? Just take a look at this chart:
Here's the bottom line: Since the creation of the Federal Reserve every 1913 dollar is now worth four cents.
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