DAILY NEWS CONTRIBUTOR
Thursday, February 11, 2016, 6:00 PM
The Fed’s policy of “quantitative easing” consists of buying bonds with money that is simply created by changing an entry in a computer.
Historically, simply “printing money” in large quantities has led to high inflation and economic disaster.
Ironically, today inflation in the U.S. is lower than the Fed would like it to be, and U.S. treasury bills, denominated in U.S. dollars and with a very low interest rate, are a popular investment for investors in other countries.
The value of the dollar defines the value of foreign currencies through the exchange rate, and is rising with respect to most currencies.
There is a hidden message in this strange behavior that suggests future trends in the U.S. stock market.
The strength of the dollar is based on the relative stability of our political system. We may despair at times over dysfunction in Congress and the issue of corporations or rich individuals “buying votes” with political contributions. But we do have a well-established rule of law, with a likelihood of illegal corruption being eventually punished.
Accounting by public corporations is well regulated, and failures do typically lead to penalties and lawsuits. And it is difficult for the U.S. government or Congress to take arbitrary actions that change the fundamental rules for businesses; our judicial system and its checks and balances may at times seem unwieldy and expensive, but it maintains a degree of stability.
These characteristics are much less established in developing countries such as China, where there seems to always be the possibility of arbitrary actions by the government.
Even in Europe, where most countries have similar legal traditions to the U.S., the attempt to use the euro as a monetary standard across borders creates problems.
And, in much of the world, unfortunately, one can’t even be sure a government won’t change suddenly because of economic or social turmoil.
The gold standard backing our currency is long a thing of the past, and gold is down some 13% over the last year in dollars. So what really defines what a dollar is worth?
I argue that the value of the dollar is defined intrinsically by the U.S. stock market. Like gold, one can buy a share of the stock market if one wants, for example, through a mutual fund that tracks the S&P 500, which represents the capitalization of about three-fourths of traded stocks.
The regulation of the U.S. stock market and prosecution of distortions such as insider trading is relatively strong, so the overall value of the market is a meaningful number and a reasonable measure of the value of the U.S. economy.
The stock market has many advantages over a commodity like gold. It represents assets that generate real returns, unlike gold, most of which simply sits in vaults.
It can grow in value to match the growth of the economy. Mergers and purchases by larger companies of smaller companies allow even an apparently limited representation of the stock market like the S&P 500 to reflect overall economic trends.
Stock valuations may even reflect the general health of the U.S. economy indirectly, as investors try to factor in the prospects for future growth or decline in overall revenue and profits.
And, hopefully, recognition of past excesses will create a more stable market less susceptible to over-exuberance or panic.
If the U.S. stock market is thus one of the few things in the world that you can invest in easily that measures real value, it should have a premium value based on that quality. World turmoil should make it an attractive place to put one’s money if a foreign investor.
So does this mean that investing in the stock market is a sure thing? Of course not. If it reflects the U.S. economy, it should have ups and downs. But it may also have a relative strength based on its potential as a haven in an uncertain world.
William Meisel is an industry analyst covering the commercial uses of speech and language understanding technology. Meisel’s 2013 book, “The Software Society: Cultural and Economic Impact,” discusses the impact of the acceleration of technology development, particularly software advances, on how we live and our economy. Meisel writes a monthly paid-subscription industry newsletter, Speech Strategy News, and organizes the annual Mobile Voice Conference in his role as Executive Director of the Applied Voice Input Output Society. Dr. Meisel began his career as a professor of Electrical Engineering and Computer Science at USC and published the first technical book on “machine learning” (Computer-Oriented Approaches to Pattern Recognition, Academic Press). He wrote a mystery novel in 2015, “Technically Dead.”
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