Our hypothesis is that after the tech bubble collapse of 2000-2002 and the economic shock of 911, the Fed began a concerted effort to inflate the currency through an unprecedented period of negative interest rates. The result of this has been a brief return to the 2000 highs in most stocks last year except of course the techs, and a substantial bubble in debt and credit derivatives that threatens to overturn the US banking system.
Here we present a few of the US stock indices as deflated by gold, showing their true performance in 'real value' terms discounting the Fed's monetary inflation. A number of commodities could have been used the same way as deflators of financial assets, among them some of the base metals, silver, and oil.
The Fed can create only paper. Inflation does not create value, it merely masks the rot of economic stagnation, but can do so for several years if the inflation can be concealed artfully. The US has been struggling through a particularly non-productive period for most Americans in terms of real wealth production especially as expressed in the growth of savings, which has been decidedly negative.
In their irresponsible foolishness and greed the Fed and the Bush Administration have managed to transfer more wealth from the many to the few, further impeding any sustained recovery since the health of the economic body has been concetrated in a few parts of questionable productive value.
This is how we coined the term "Potemkin Economy" many years ago. It is a cruel illusion of the Fed, the Treasury, and their associates in misdirection and deception. For that is what this has been, regardless of motives or intentions. It is a disgraceful espisode in our country's history, but this is what happens when one gives themselves over to the rule of fear and greed.
Here is the Dow Industrial Average, deflated by gold. It is also known as the "Dow-Gold Ratio." Long run the ratio tends to return to 2. It seems to be well on its way.
SP 500
Russell 2000
