What do you get if you adjust the DJIA for inflation, starting in January 1924? According to several sources, the rate of growth is a paltry 1.64% compounded annually when you take into account the 'official' inflation rate, and it's even worse if you consider the probability that inflation is underreported.
The Real DJIA
This article outlines the basic argument. It provides the basic approach and some conclusions, as well as links to additional resources. The ratios seem almost too simple... but it appears that the relationships exist.
Once, Twice, Three Times a Warning
The Federal Reserve has issued three warnings that the stock market was overvalued relative to historical levels:
In a 3/7/97 article in The Wall Street Journal re. the then recent use in a 12/5/96 speech of the term "irrational exuberance" by Alan Greenspan, chairman of the Federal Reserve Board in Washington, the authors wrote: "Fed chairmen usually don't say much about the stock market. In fact, the only notable earlier Fed warnings date to 1929 and 1965." (The Fed was founded in 1913.)
The author points out some interesting facts about the timing of those warnings, in relation to the inflation-adjusted DJIA.
Housing Values At 2X Historical Norms
This interesting chart showing housing values normalized to 1890 values, adjusted for inflation, shows that recent housing values are radically out of line with historical values.
My question: What is the source of all the money (or credit if you prefer) used to purchase all those homes, driving the values far beyond historical levels? If this is not an indication of massive credit inflation, then what is?
Live to Borrow, Borrow to Live
Ours is a debt-based economy. Our monetary system is based on debt; our banking system runs on it. American household saving rates are now in negative territory. Fractional reserve banking and debt-based spending ensure that economic activity runs well ahead of actual wealth. What happens when the credit noose is tightened?