I'm not an economist.
I do know how to use least squares to find a best fit curve.
Curious, I found a set of data showing the annual Dow Jones Industrial average values since 1928 and tried to find a best fit curve. Nothing really looked reasonable when the range was the entire time period, but I noticed what appeared to be a "sea change" around 1980.
To make a long story short, to my mind the best fit was to use a different growth factor starting in 1980. The curve below shows an annual 2.2% gain from 1928 through 1979, followed by a 10% annual increase starting in 1980. Take a quick look. The last plot shows the curve as it should be as of 12/1/2009 and the DJIA as of 12/15/2008. It looks like a simple 85% gain over the next year will bring us back to the curve!
What happened in 1980? Well, I simply don't know. I did find that was the year that Congress prevented banks from leaving the regulatory authority of the Federal Reserve, permitting the FED to have total control over monetary policy. I have no idea if that is a root cause or not.
I am sure of a couple of things. The 10% increase has resulted in a curve steepness too impossible to maintain, and to revert back to the mean of the curve would mean an impossibly huge market increase in 2009.
What has our government done to cause our economy to work itself into this mess?
1 comment:
John;
What I see is a curve that has had its upward trend broken. But this, IMO, is a whole new ball game. As you pointed out in your comparison to the Chinese economy we have entered into socialism in a major way and have a very liberal administration ready to 'change'. The problem is that they know not what they change. The world economy has run on the capitalistic engine called America and its consumption for decades. If America is no longer able to consume to whom will the inexpensive manufacturers sell their goods? This scenario usually leads to an arms race because after all; every good dictator needs guns, bomb, and amo.
Bill
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