Both the financial markets and the Obama administration were jolted last Friday when the Bureau of Labor Statistics (BLS) reported that zero net jobs had been added to establishment payrolls during August. And, while the generally-more-statistically-reliable BLS Household Survey said that 331,000 more Americans had jobs in August than in July, August’s total employment number was still 411,000 below what it had been at the start of Obama’s so-called “economic recovery”, 26 months earlier. Right now, the total number of people in the U.S. with jobs is no higher than it was 7 years ago, when our adult population was 16.2 million less.
The BLS report added more urgency to the speech that the president is planning to give on this week. In this speech, Obama will propose measures to create jobs. He is no doubt keenly aware that if the U.S. unemployment rate does not start falling soon, his personal unemployment rate will likely go to 100% on January 20, 2013.
It is not known at this point exactly what Obama will propose, or how much of his program will make it through Congress. However, if you want to know if the economy is going to start creating jobs fast enough to bring unemployment down significantly, just keep your eye on the “Real Dow”. The Real Dow is the Dow Jones Industrial Average divided by the price of gold.
Based upon quarterly numbers, the Real Dow peaked at 42.08 in 2Q1999. On September 2, 2011 it was 5.97. In other words, despite all of the additional capital invested over this 12-year period, this proxy for the real market value of American businesses declined by 86%.
Here’s another way to look at the significance of the Real Dow. An investor who put $100,000 into the Dow 30 stocks at the end of 2Q1999 would have had about $125,000 on September 2, 2011 ($102,456 plus accumulated dividends). If he had invested the same $100,000 in gold, it would have turned into $721,916.
Investors look at companies the same way that you view your 401K. Imagine that you put $100,000 into a 401K account with an investment advisor at the end of 1999. Now, imagine that over the ensuing 11 years, you deposited an additional $38,000. Finally, imagine that you called up your advisor at the end of 2010, and he told you that your 401k was now worth $25,000.
What are the chances of that you would give that financial advisor more of your money to invest? Not very likely, is it? Would it change your mind if he told you that you had an obligation to invest with him because it would create jobs?
Progressive Keynesians, like Obama, believe that what drives the economy is spending, and that increased government taxing, borrowing and spending can increase total demand. Neither of these propositions is true. The economy is powered by capital investment.
A rising Real Dow rewards job-creating investments, like plant and equipment. A falling Real Dow punishes such investments, thus causing investors to shift their focus to inflation hedges, like gold, and to risk-free assets, like government bonds. These investments do not create jobs, but they help preserve capital.
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