The Fiat Dow

Nominally the Dow is at the highest point in history, but very few, if anyone, seems to be jumping for joy. Economist John Taylor argues that the Fed's quantitative easing has not only failed to fix the economic problem but that it has been an actual drag on the recovery.

Editorial of The New York Sun
January 29, 2013
NY Sun

As the Dow Jones Industrial Average edges close to 14,000 let us just remark on the value of the famous index in ounces of gold. It may be that 14,000 is nearly twice the 7,949 at which the industrial average stood on the day President Obama was sworn. But what are we to make of the fact that the value of the Dow is actually lower today, having slumped to 8.38 ounces of gold from the 8.7 ounces at which it was valued on January 20, 2009?

We are by no means the first to ponder this point. There is a whole Web site that charts the Dow in gold. The value of the Dow was actually 44 ounces of gold as recently as 2000. So the drop is not small. Congressman Ron Paul marked this point in March 2011, when he was chairman of the House monetary affairs subcommittee and was questioning the Chairman Bernanke. We’d but add that one could call the index that is nearing 14,000 the “Fiat Dow.”

There has to be some explanation, after all, for the fact that even though the Dow is within a whisker of 14,000, no one seems to be jumping for joy. Nominally the Dow is at the highest point in its history but few, if anyone, around town are popping Champagne. One could call it the Obama Dow, but that would be unfair to the president. For the collapse of the value of the Dow — not the number, but the value in ounces of gold — didn’t start on his watch.

The fiat nature of the current Dow Jones Average, in any event, would underscore the points made in an op-ed piece in this morning’s Wall Street Journal. In it the economist John Taylor argues that the Fed’s quantitative easing has not only failed to fix the economic problem but that it has been an actual drag on the recovery. For, among other reasons noted by Mr. Taylor, the Fed’s easing enables government over-spending, delays the writing off of bad bank loans, and hurts private lending the way rent control reduces the supply of housing.

Professor Taylor notes that, ironically, “the harmful effects of these interventions lead policy makers to expand them, which further increases their harmful effects.” He says that no one should want a “continuation of this vicious circle.” He ends with the more optimistic thought that if the economy “surprises a bit on the upside,” the Fed could halt its asset purchases, bolstering growth and helping put the economy “on a sustained recovery path.” One sign of whether the Fed has done that, we predict, will be a rising value of the Dow in ounces of gold.

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