Thursday, 19 February 2015

The Stock Market Boom, Industrial Production and Real Economic Progress

The industrial production numbers for January are just out, showing a reasonably strong y/y increase of 4.8%. 

But here's an interesting fact: since the end of December 2007 industrial production in the U.S. has increased a grand total of...wait for it.... 5.4%! During the same period, the U.S. stock market has surged a magnificent 86.4%, outpacing industrial production 16-fold. As a result, the ratio between the two has increased almost 77% during the same period, smashing the just under 57% increase during the 2000 to 2007 period.  


Industrial production does not matter anymore, some say. Well, production always did matter in the past and it will continue to do so as long as people consume and businesses attempt to satisfy consumers. Something is clearly out of whack in the U.S. economy where faulty monetary policies have done little, in addition to draining the country of voluntary savings, but fuel a gigantic stock market bubble of historical proportions. 

Stock market gains themselves do not represent gains to society just as stock market losses do not inflict losses on society. All these gains and losses do is shift the distribution of wealth and the income received through dividends. As a continuously rising stock market over longer periods can only be brought about by inflationary policies and as inflationary policies can only serve to inflict damage on economic progress, a rising stock market over extended periods is a symptom of a sick economy and not a progressing one. Therefore, though the coming collapse of the U.S. stock market, or poor future returns at best, will inflict real monetary losses on many, the real damage to the economy has in fact already been made during the bull market. 

Increased industrial production on the other hand, assuming of course stuff is ultimately made that consumers demand, produces real economic gains to society. Such a development, combined with non-inflationary monetary policies, would lead to the near mirror image of the chart above reflecting sound and sustainable economic progress. As the ratio between the stock market and industrial production has, bar a few dips, more or less continuously increased since 1984 (when the dollar was relatively strong), I would not be surprised if many Americans miss those days some 30 years ago. Back then, industrial production grew 58% faster than it does today (based on 30-year annualised percentage change) with a substantially smaller population.



Related:

Welcome to A Very Dislocated 2015

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