The Dow Jones Industrial Average, an index that consists of 30 major companies, surged to a new all-time high.  It went passed 14,200, beating highs last seen in 2007.  But did the Dow really just hit a new high?

In nominal terms, the Dow has set a record.  But in real terms, it really hasn’t.  If you adjust for price inflation, the Dow is actually still below its high in 2007, at least as of this writing.  If you compare it to 2000, the Dow is way below its highs if you adjust for inflation.

And this is just using price inflation numbers as determined by the government.

If you use the adjusted monetary base, the Dow is a major loser, along with many other things.  The monetary base has more than tripled since the fall of 2008 and it is still growing by leaps and bounds.  By this standard, the Dow has dropped by over two-thirds.

(If anyone knows of a good resource that shows the history of the ratio between a stock market index and the monetary base, please let me know in the comments.)

The most interesting thing about the Dow hitting new nominal highs is the similarities to another time period in American history.  The late 1920’s saw seemingly booming times.  Some argue against the Austrian Business Cycle Theory saying that the bust (the Great Depression) happened without there being prior inflation.  Of course, these critics, when they say inflation, are referring to consumer price inflation.

But Austrian school economists are quick to point out that there was monetary inflation.  It didn’t show up in consumer prices, but did show up in asset prices, particularly stocks.

Ironically, some Austrians were wrong in predicting imminent price inflation when the Fed started going crazy with its money creation in 2008 and 2009.  These people should have paid attention to their own lesson of the 1920’s when we saw significant monetary inflation and a stock market bubble, without significant consumer price inflation.

So when there is big monetary inflation (which we have now), it doesn’t necessarily have to show up in the price of food, gas, clothing, etc.  It may or may not.  Over time, overall prices will increase.  But in the short term, inflation is not uniform.  The newly created money hits certain hot spots.  Some sectors will see bigger price increases than others.  And it does not all have to show up in consumer goods.  It can, and this case did, show up in asset prices such as stocks.

This is not a prediction of where things go from here.  It is really anybody’s guess.  But as long as the Fed keeps pumping out more money at a rapid pace, I would be surprised to see a big crash in the stock market in the near term.  The Fed is making the money and stocks are one of the hot spots right now.