Tuesday, September 15, 2009

Dammit, Jim, I'm a Pastor, Not an Economist!

Something's been messing with my head for a few months, and I need to figure out where my thinking has gone astray.

My church still exists because it has an endowment. The health of that endowment is tied to the markets, which for a while there were tanking in nail-bitey ways. For a while there, I was spending really unhealthy amounts of time at cnbc.com. Now, though, the Dow and the NASDAQ and the S&P500 are all rebounding. The Dow, for instance, has gained around 3000 points since February, as it pinged off of a sub-6,500 floor. Stock market averages are a pretty standard metric for measuring the health of an economy, and so an uptick of this pointitude must mean things are getting better, right?

I'm just not sure. Why? Because I'm not sure the Dow is ultimately a meaningful measure of economic health. The reason for this is...well...perhaps just my own stupidity.

Here's what I don't get. To my understanding, what the Dow measures is a price-weighted index of the market value of 30 major corporations. As the price of those stocks rise, the Dow rises. As the price of those stocks falls, the Dow falls. Simple. Other market averages act in the same way. Where I struggle with market averages as a measure of economic health is that...as best I can tell...the standard against which the Dow assesses value is not empirically meaningful. "Points" on the DJIA are not fixed units of measure in the same way that centimeters or kilocalories are a unit of measure. Those points are tied to the value of a currency, in this case the United States Dollar. And the value of the dollar can vary wildly. It can be impacted by fluctuations in money markets, as investors express confidence or lack thereof in the well-being of that country. It can be impacted by...oh..let's pick a scenario at random...printing trillions of dollars of new currency into an economy as part of a stimulus package.

If corporations were entities that only existed within one nation-state or currency marketplace, then their value would be largely tied to that nation-state's currency. But with corporations now existing in a globalized marketplace, they cease to be meaningfully tied to one currency. So if both the point value and the points themselves are variable, why is the Dow trustworthy as an empirical measure of the health of the economy? It's a measure of the value of a corporate stock in dollars...nothing more.

Sigh. I'd probably better stick with theology.

1 comment:

  1. Paragraph five of this article says pretty much the same thing: http://mises.org/story/3717

    ReplyDelete