Larry Summers Says Buy Stocks

The President’s economic advisor, Larry Summers, noted last week that:

“Although there could be many ways to question this calculation, that the market would be at essentially the same real level as it was in 1966 when there were no PCs, no Internet, no flexible manufacturing, no software industry and when the work force was half and net capital stock was a third of what it is today, may be regarded by some as the sale of the century.”

Observations

This implies that the dollar is worth is worth less than 1/7th of what it was worth in 1966.

This calculation does not take into account the dividend stream from owning the Dow Jones stocks.

Per Mr Summers calculations, stocks have gained zero for the past 43 years after adjusting for inflation.

There is something fundamentally wrong with the American economy when the value of America’s Dow 30 stocks do not increase in real value over 43 years.

It is very difficult to increase your wealth by investing in the stock market.

The buy and hold theory for stocks may help brokers sell stocks, but for the long term investor it is a cruel hoax.

If you bought the Dow Jones in 1966 at 1,000 and sold today at 7,000 you would be in a loss position on your inflation adjusted capital, after paying capital gains taxes.

Buying stocks has returned a zero gain for the past 43 years but Mr Summers says that stocks are now the buy of the century.  Does this make him an idiot or a genius?

Mr Summers should focus on ways to create real wealth and jobs in America that are not dependent on excessive leverage.   We tried to get rich with borrowed money and easy credit and it obviously did not work for the majority of Americans.  Instead of pursuing that same losing strategy, maybe it’s time for a new approach.