We are headed into a recession, or are already there; right? We have a pretty well know stimulus package coming. What will "they" say if we drop into/continue recession? They will, predictably, say that the recession would have been much worse if we hadn't had the package. How, in the absence of the possibility of observable alternate universes to study, can one possibly either prove or refute that view? Economics is an imprecise science in the same degree that voodoo is an imprecise science. It's problem is that there is such complexity, so much concealment, and so much feedback based on fallable human decisions that, not only can it not predict the future to any extent, but it can only imprecisely report on the past. Given this impreciseness, it is predictable (I don't feel I am going out on a limb here) that the most ardent supporters of the plan will be right out front claiming that the package was successful beyond their wildest dreams. That would, incidentally, basically the same cohort that, after admitting that all of the reasons given for going to war with Iraq proved false, claims that the war was a good idea anyway. Why? Because if we hadn't gone into Iraq, there was some chance that in the unforseeable future, they might become powerful enough to attack us. So, I am sure that the Administration, the Republican stalwarts, and the press sycophants will all acclaim the sucess of the package.

The plan is already a success for the supply-side crowd: it is, after all, a litmus test. They wanted to see who all in congress would swallow the line that tax cuts stimulate the economy. Turns out, the supply siders still have the majority of congress. Nobody's breaking ranks to say this idea sucks and will fail, and will only give a temporary mask for some serious problems with a shot of unhelpful inflation.

You're forgetting that the dems are on board. Well, maybe not "real" democrats, but people with the "D"s next to their name.

I have been registered as non-partisan for almost 40 years. Before that, I was registered as an R, in deference to my approval of (the undeniably imperfect) Eisenhower. Nixon cured me of any misconceptions I might have had. I think I liked Ike because he understood, as a very long-term civil servant, that the function of the executive branch was to execute the laws, as written. That doesn't mean that he didn't sometimes bite his tongue and that he didn't sometimes jawbone in opposition to some proposed change. However, once a law was fact, he executed it. He was a good and obedient CEO and I appreciated that.

I do not question that the Ds are onboard. However, I think that the reason for any correspondance between the plan that they have proposed and the President's plan is that they know they have no hope of overriding a veto and thus, a reasonable plan (like mine, for instance) would never go into effect. If the bad plan did not take force, all those people who were expecting a few hundred bucks in fiat paper would, at the time of the general elections, tend to blame the Ds. We know that the problem really lies with the P. My differential expectation is that the Ds will be less harmful to the country than would another term or two of Rs. I also suspect there will be some footdragging by the P, which will be blamed on agencies like the IRS, which he administers, in order to see that the receipt of the checks is timed for the maximum effect, in favor of the Rs, on the elections.

Phil, do you see this as I do. I haven't been around in a while.

I see the DOW as less and less a measure of the U S economy. It is no longer as connected to U S jobs as it was in Eisenhower's adminsitration.

With globalization, GDP is also less and less a measure of the U S economy.

So the muddy water is getting muddier and muddier.

I usually watch my account while the market is open. I have about 40 equities and a few funds and ETFs. There are three phenomena which are educational:

My various investments (and they are widely distributed, by industry, by size, and by country) clump whenever the DOW is very far from even, moving like a pile of iron filings chasing a magnet.

The frequency of the changes in direction of the DOW is often on the order of a cycle every two hours. That is much greater than the economy could possibly be imagined as moving.

Overseas investments prices are coupled to US stocks much more closely than one could ever imagine or explain. The only limits seem to be that all the world's markets are not open at the same time, but the stocks which are traded as ADRs do follow closely.

I think that what has caused this obvious decoupling is the presence and heavy participation in various speculative instruments: puts, calls, short sales, and other things which do not contribute a bit to the funding of corporations, which is the supposed purpose of having a stock market. The battle cry of the supporters of all these non-productive instruments is always "increased liquidity". Nonsense! Many transactions which are now considered part of the market are pure gambling: double or nothing bets on whether the VIX, or volitary index will be higher or lower the next day. And I thought all that interstate gambling was somehow illegal!

As to the GDP, considering that the change in GDP is what is most anxiously watched, with a 1/2 percent change being a relatively big deal, it is not a very precise or complete index. If I understand it correctly, it does not include intermediate industrial activity, but only "end products", and thus leaves out a lot of what is actually happening. Besides that, it relies on a very close determination of the actual inflation rate since that is applied to the change calculation. Since the weighted price of everything is a slippery fellow, it is very difficult to believe the inflation rate to a tight enough tolerance to make the changes in GDP meaningful. This failure to accurately measure a basic index (and, as run often points out, unemployment is equally hard to measure and is therefore suspect) means that, on any given day, you can see analysts and observers on CNBC (the major financial news channel) variously reporting that there will be a recession, there won't be a recession, or we are already in recession. They all are familiar with the published indices and, being economists of some sort, should be able to understand them. I fear we are adrift on a sea of impreciseness.

You have to excuse me, this is off track of the discussion to a degree but is was something I had been thinking about which doesn't deserve a top post and seems to fit in a bit...

Shouldn't the stock market rise in the face of an expansive monetary policy? Given that anyone who owns stock should be interested in it's maintaining real and not just nominal value? That being the case isn't the difference between the amount that the money supply is inflated and the performance of the stock market key? And if the stock market falls while the money supply/cost of capital becomess looser then doesn't that mean the stock market is performing even worse than it appears on the surface?

"Shouldn't the stock market rise in the face of an expansive monetary policy?"

Only if the expansive monetary policy is translating into higher profits.

"That being the case isn't the difference between the amount that the money supply is inflated and the performance of the stock market key?"

No. Because past performance does not predict future results. When I put money in the stock market, I'm not betting on the economy, I'm betting on individual companies, or fund managers.

I think it is interesting that you, like myself, use the term "betting" rather than some phrase which would indicate that you see yourself as supplying capital for economic expansion. I think the east objectionable of all the possible market operations a person might engage in, long purchases are the least objectionable. In truth, it is only the buyers of newly issued stock or the original purchasers of corporate bonds who are clearly providing capital.

Well what we are talking about is maintaining value. If business prospects remain static and the money supply is increased then stocks must increase in value to maintain real value, since by increasing the money supply we reduce the value of the currency. Stocks in this light are no more than any other consumer good when the money supply is increased and inflation occurs. Of course business prospects are never static, but put it this way. If the value of equities should experience the same inflationary effect as other consumer goods when the money supply is increased, and business prospects become more favorable as the money is increased then the value of equities should increase in relation to the inflationary efffect and increase due to the change in the business climate, there should be a dual effect. Conversely if the money supply is increased reducing the value of currency and the value of equities remains the same then business prospects must be pretty poor because equities are losing real value, their price is expressed in dollars worth less.

It just strikes me that money is injected into the system and it makes news that the stock market goes up, it should just to reflect an adjustment to maintain real value.

"supplying capital for economic expansion."

Well, I'm a small fish. Must admit, never participated in an IPO. However, if I'm buying, someone else must be selling. That means, when I buy, I free up a seller to buy something else, including an IPO.

That said, "supplying capital" is betting. Betting that whoever takes your money can grow *it*. The economic expansion aspect is not why people invest.

Gingham, what the stock market will do in a year is not the same as what it will do in a decade.

Jan 1997, the raw CPI was 159.40.

Today, the raw CPI is 211.160. It's a 32% increase.

The battered dow now is 12,480. Jan 1997? the HIGH was 6953. That's a 79% gain, AND, that does not include DIVIDENDS.

Now, you can pick a year when the dow didn't beat inflation. A couple years, in fact! Longterm, however, it's abundantly clear inflation got it's ass beat by the dow.

In the short-term, the dow's setbacks are a buying opportunity. It will take several quarters before rate cuts work their way through the economy and onto the income statements of publicly traded companies.

Lol, take it easy, I made no statement as concerns the wisdom of investing in stocks or the long term performance of the stock market vs. inflation. I was simply trying to connect inflation and the value of stocks, and trying to make the point that just as gas goes up when the dollar is devalued through expansive policy so should stocks.

"I was simply trying to connect inflation and the value of stocks"

The point I was trying to make is, you can't connect inflation and stocks. They are both going up most of the time, so there's a temptation to correlate them. But, there is no correlation to make! Stocks can go down even when inflation goes up.

To the extent that you view inflation as the weakening of the dollar, you have to see a connection between inflation and stock prices. If there is a synchronous worldwide inflation or in the case of stocks that are only traded domestically, that is not so clear. However, if the world market establishes the price of stocks in terms of their own currencies and the dollar drops relative to those currencies, then you should expect the stock prices to rise when measured in dollars.