I had no trouble connecting to the site Alex gave you. I think you tried when the server was very busy or perhaps you should have rebooted your computer. Anyway, I have the following for you. It's from the Philadelphia Inquirer:
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Business
Friday, August 15, 1997
IS RISE OF STOCKS INFLATIONARY
Having recently discovered the wonders of e-mail, Ed McKenna of
Media takes mouse in hand to pose the following question:
``The rise in the stock market seems to me to be inflationary of and by itself. If any other asset went up by 300 percent in the past four years, it would certainly be considered inflationary. Is the rise in the market not calculated by the government when calculating the amount of inflation?''
Actually, no. The government's main measurement of inflation, remember, is called the Consumer Price Index, the key word here being consumer. Although its accuracy is debatable, the CPI is designed to measure changes in the cost of living: how much it takes to purchase essentials such as food, shelter and clothing.
Stocks and other financial assets are a different story. In the words of Wharton professor Jeremy Siegel, ``you don't eat your stock certificates.'' (You might, under certain circumstances, use them for
wallpaper, which I guess could count as shelter. But that's a topic for another, I hope far-distant, day, and another section of the newspaper.)
Stocks trounce inflation
In the last four years, stock prices have indeed risen by mind-boggling amounts. The Standard & Poors 500 index, a leading market gauge, is up more than 126 percent since August 1993, or more
than 23 percent per year. The Consumer Price Index, by contrast, is up a mere 10.84 percent, or less than 3 percent per year. And it's slowing further: Data released yesterday showed a nearly flat annual rate of about 1.5 percent.
But it's not as if we're talking complete apples and oranges here. Stock prices and consumer prices aren't the same animal, but they have plenty to do with each other. As a general rule, price inflation is poison for stocks. It's no coincidence that the last really horrible
bear market on Wall Street occurred in the mid-1970s, at a time when consumer prices were approaching double-digit jumps. Not only does inflation shrink the current value of a company's future profits -- which is how investors calculate a stock's rough worth -- it also clouds the general economic picture, lowering people's confidence, increasing uncertainty and making everyone less eager to save and invest.
Inflation also typically drags up interest rates, making it more attractive to invest in bonds, bank certificates or gold, rather than equities.
The relationship between stock and consumer prices doesn't work in just one direction, however. The market's rise has made many people an awful lot wealthier, and some of that wealth has been converted from ``paper'' into BMWs, fancy new houses, and trips to the Bahamas. ``The booming housing market that we're seeing is directly related to the stock market,'' says Mark Zandi of Regional Financial Associates in West Chester.
Healthy or bananas?
A healthy, rising stock market also encourages entrepreneurs to tap into it, either to expand or start new businesses. Foundations with large endowments can increase charitable, social and cultural gifts.
And governments at all levels see higher tax receipts, allowing them to either increase spending or cut tax rates.
There is a critical difference, of course, between a healthy, rising stock market and a stock market that's gone bananas. The latter features wild speculation and metastasizing prices -- what Fed
chairman Alan Greenspan referred to in a famous speech last year as ``irrational exuberance.''
Greenspan's point then was exactly on point here -- that a stock market that got too far ahead of itself could bring on the same kind of instability that inflation creates. What Greenspan called a ``collapsing financial asset bubble'' could spread throughout the real economy by forcing cuts in both spending and investment.
Stock prices may not constitute inflation, in other words, but that doesn't mean they can't become inflated. |
