P/E ratio of S&P 500 Missing

Following the P/E ratio of the S&P 500 can help investors determine if stock prices are inflated, depressed, or realistic. If a P/E ratio, also called a multiplier, continues reaching record highs for the S&P 500, it suggests the index for the 500 biggest companies may be too high with respect to reported earnings and earnings growth.

The P/E ratio for the S&P 500 hit 140.76 on September 30, 2009. Here are some recent historical values:

12-31-2007 22.19
12-31-2008 60.70
03-31-2009 116.31

In Gary North's Specific Answers of November 17, he notes that Standard & Poor's no longer makes the S&P 500 P/E ratio available to the public. According to an email he received from their webmaster, you must register with their website first, then log in to see it. Why is S&P doing this? Here's North's interpretation:

This is a polite way of saying, "This site is not for the sake of the general public. It is for the sake of the retail brokerage industry. So, please go away."

My guess is that the company came under pressure from the brokerage industry to stop publishing what has to be a frightening statistic for brokers, a statistic that says "Sell!"

The best way to call attention to something is to try to hide it.

SNL lampoons U.S. Debt to China

Saturday Night Live actually takes a free market perspective in this recent skit. ( Thanks to Lew Rockwell Blog.)

What is "good" inflation?

Any price inflation that is an outcome of consumer preferences should be construed as good. According to economist Joseph Salerno, there are two kinds of benign inflation:

1. Innovations that permit people to economize on the amount of money they hold in their cash balances brings about a decrease in the demand for money, which in turn tends to raise prices, all other things being equal. Credit cards, for example, enable people to make purchases without drawing down their cash balances. By increasing the demand for goods without a corresponding increase in the money supply, price inflation results.

. . . cash-economizing inflation is benign precisely because it is an outcome of individuals striving to optimize their property holdings through the voluntary exchange process. It is also noteworthy that this kind of inflation involves a one-shot increase in prices: once the new payment method or invention becomes broadly adopted, the decline in the demand for money ceases and prices stop rising. Lastly, inflation caused by people responding to opportunities to economize on their money holdings has no systematic effect on credit markets and the interest rate and therefore does not precipitate the business cycle.

2. A second type of "good" inflation comes about when the supply of goods and services is reduced because of natural disasters, the depletion of natural resources, increases in people's preferences for leisure (which means fewer people are working), or an increase in demand for present consumer goods (which means capital goods are not replaced). In any case, an excess demand for goods has emerged from a reduction of their supply. With a constant stock of money prices will tend to rise.

Once again we note that, unlike the ongoing price inflation that is typically caused by central-bank expansion of the money supply, the inflation generated by diminished supplies of goods is a one-shot affair. Prices stop rising as soon as the supplies of goods and services stop decreasing and stabilize at the lower level consistent with the change in the economic data.

"Scarcity" inflation is thus socially beneficial because it facilitates economic calculation and smoothly operating markets in a situation in which people's preferences or their production opportunities have undergone a radical change. History has shown time and again — during wars, revolutions, sieges, and crop failures — that any attempt to repress scarcity inflation via price controls or centralized distribution of necessities results in calculational chaos, widespread poverty, and social disorder.

Our conclusion is, thus, that a rise in general prices driven by the demand for money always improves economic welfare as Austrians understand that term.

Gary North, What is Money? Parts 1-17

Gary North concluded his outstanding series of articles today on What is Money? The links to all seventeen essays are posted below as well as on BRC. I encourage you to read them again and again until their messages are firmly understood and remembered.

Part 1: Introduction
“If you don't know what money is, how will you obtain more of it?”

Part 2: Precious Metal Coinage
“Counterfeiting is universally condemned by civil governments . . . because they are all counterfeiters, and they deeply resent an invasion of their turf.”

Part 3: Schizophrenic Economists
Economic textbooks don’t treat central banking as a cartel, yet it unquestionably is.

Part 4: Bait and Switch
Through fractional reserve banking, “bankers knowingly promise more than they can deliver to every depositor.”

Part 5: Fractional Reserve Banking
“Banks are government-licensed institutions that issue bogus IOUs. Because these IOUs function as money, they are counterfeit money.”

Part 6: What Makes Money Different?
Unlike the supply of other goods, “an increase in the money supply conveys no verifiable social benefit. Early owners and early users gain benefits. Late-users experience losses.”

Part 7: Gresham's Law
‘Bad money drives out good money’ is not a failure of the market. It is a failure of government-imposed price control.

Part 8: Why Gold Has No Intrinsic Value
As with other economic goods, gold’s value is imputed, not intrinsic.

Part 9: Monetary Reform
The Fed should be made completely independent from the federal government: “cut loose and left to fend for itself.” When that happened to the Second Bank of the US in 1836, it went bust.

Part 10: When Money Dies
“When money dies, so do people." In a modern urban society, maybe a lot of people.

Part 11: The Great Default
“Ultimately, it is either the great depression or the Zimbabwe option.”

Part 12: Why Central Banking Persists
“It is not surprising that central banks never get shut down or disestablished, not even after they create nightmare hyperinflations. The victims do not recognize the perpetrator: fractional reserve banking.”

Part 13: Exported Inflation
When physical money is sent out of the country, it shrinks the supply of digital money in fractional-reserve American banks, making prices cheaper. Inflation is exported mainly by illegal immigrants.

Part 14: Money and Uncertainty
“Entrepreneurs make money by buying uncertainty with whatever money they own or borrow. Security-seekers gain their goal by forfeiting opportunities to get rich. In a free market, each participant is allowed to bid for the outcome he prefers. The great threat to a buyer of security is [the banking system’s expansion of the money supply, inflation].”

Part 15: Hoarding, Old and New
Someday, perhaps, central banks will stop subsidizing their respective Treasury Departments. On that glorious day, governments will move rapidly toward bankruptcy, interest rates on government debt will rise, the markets will begin to crash, consumer prices will begin to fall, and the mother of all bank runs will begin. Get there early.

Part 16: Inflation and the Savior State
What is sovereign in this world? The majority of economists affirm the sovereignty of the state. The sovereign state always becomes the inflating state. The market should be sovereign.

Part 17: Conclusion
Austrians say that the free market can provide a system of world money. We have already seen this system in operation. It was called the gold standard. It operated for most of the nineteenth century. It needed no world government and no world central bank to make it work. It did not need trained economists to make it work. Is it any surprise that the gold standard is so unpopular?

What would happen if China dropped its peg?

Many analysts and politicians see China's peg to the American dollar as a weapon it uses for grabbing market share and stealing jobs from U.S. manufacturers. But the reality is quite different, argues Peter Schiff, who says that "de-pegging would cause the economic equivalent of cardiac arrest." Yet this "tough love" from China and other countries would be much-needed medicine.

Our economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China's purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables our politicians and citizens to continue spending more than they have and avoiding the hard choices necessary to restore our long-term economic health.

Contrary to the conventional wisdom, when China drops the peg, the immediate benefits will flow to the Chinese, not to Americans. Yes, prices for Chinese goods will rise in the United States – but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. As anyone who has ever been shopping can explain, low prices are a good thing.

In addition, credit will expand in China while it contracts here. When China abandons the peg, it will no longer need to swell its currency reserves by buying Treasuries or other dollar-denominated debt instruments. Other nations will no longer feel the pressure to keep their currencies from rising, so they too could throttle down on their onerous dollar purchases. . . .

A weaker dollar will price many imported products beyond the reach of most Americas, giving our hollowed out manufacturing sector the opportunity to rebound. However, if our industry has any chance of getting off the mat, we must reduce taxes, repeal regulations, reform our cumbersome legal system, and, most importantly, replenish our savings to finance the necessary capital investment.

Bastiat on money

From Frédéric Bastiat's essay, What is Money?:

For riches, don’t you see, are not a little more or a little less money. They are bread for the hungry, clothes for the naked, fuel to warm you, oil to lengthen the day, a career open to your son, a certain portion for your daughter, a day of rest after fatigue, a cordial for the faint, a little assistance slipped into the hand of a poor man, a shelter from the storm, a diversion for a brain worn by thought, the incomparable pleasure of making those happy who are dear to us. . . .

If . . . you look upon an abundance of useful things, fit for satisfying our wants and our tastes, as true riches, you will see that simultaneous prosperity is possible. Money serves only to facilitate the transmission of these useful things from one to another, which may be done equally well with an ounce of rare metal like gold, with a pound of more abundant material as silver, or with a hundredweight of still more abundant metal, as copper. According to that, if a country like the United States had at its disposal as much again of all these useful things, its people would be twice as rich, although the quantity of money remained the same; but it would not be the same if there were double the money, for in that case the amount of useful things would not increase. . .

. . . you cannot reasonably think that if the quantity of corn, cloth, ships, hats, and shoes remains the same, the share of each of us can be greater, because we each go to market with a greater amount of real or fictitious money. . . .

Do you believe that if it were merely needful to print bank-notes in order to satisfy all our wants, our tastes, and desires, that mankind would have been contented to go on till now without having recourse to this plan? I agree with you that the discovery is tempting. It would immediately banish from the world, not only plunder, in its diversified and deplorable forms, but even labor itself, except in the National Printing Bureau. . . .

. . . this depreciation [of money], which, with paper, might go on till it came to nothing, is effected by continually making dupes; and of these, poor people, simple persons, workmen and countrymen are the chief. . . .

Just as in money we see the sign of wealth, we see also in paper money the sign of money; and thence conclude that there is a very easy and simple method of procuring for everybody the pleasures of fortune. . . .

When once false money (under whatever form it may take) is put into circulation, depreciation will ensue, and manifest itself by the universal rise of every thing which is capable of being sold. But this rise in prices is not instantaneous and equal for all things. Sharp men, brokers, and men of business, will not suffer by it; for it is their trade to watch the fluctuations of prices, to observe the cause, and even to speculate upon it. But little tradesmen, countrymen, and workmen will bear the whole weight of it. The rich man is not any the richer for it, but the poor man becomes poorer by it. . . .

Is the Fed "independent"?

This is a fiction, as Congressman Ron Paul and Senator Jim DeMint explain.

It's always dangerous to fight government problems with government solutions, even when the solution - in this case, Fed transparency - attempts to curb the power of the state. But Paul has made it clear over the decades that his ultimate goal is to abolish the Fed and return monetary sovereignty to the market. His efforts at making the Fed more transparent keeps the Creature in the spotlight where it can more easily be slain.