Another Sign of American Decline: Adjusted for Inflation, the S&P 500 is unchanged for 14 Years

I have to say, I really love the FRED database, it really lets you play around with so many numbers in such an easy and quick way. The other day, I decided to take a look at what happens if you inflation adjust the S&P 500 index by the PCE deflator. First, here is the chart of the unadjusted S&P 500:

As you can see, we aren't that far from an all-time high in the index, just a little over 11% away.  Essentially about the rally we would see in a good year.  That really masks though the effect of time on the value of your dollar.  Here is what happens when you adjust it for inflation:

As you can see, we aren't anywhere near the highs when you adjust for inflation.  We are still about 30% below the 2000 peak and 20% below the 2007 peak and given the economy seems to be rolling over, that gap is unlikely to shrink much anytime soon.  We're currently at the same inflation adjusted level as we were in February of 1998, so if you invested money over 14 years ago, you will have faced quite a bit of volatility for no actual gain in your purchasing power.  If you view the stock market, especially long term, as a good proxy for the health of the economy, you can see that our economy is quite sick.

So what should we do about it?  The chart gives you a hint.  The huge jump in stock prices occurred at the same time as the internet revolution, which was the last time that the United States actually built something from nothing domestically.  We need to do that again and this time keep the jobs that came from that revolution in the United States.  I'm not saying we should punish companies from going overseas, I think we should eliminate many of the issues which are forcing them to go overseas, such as excessive regulations.  There is certainly a minimum that we shouldn't go below, but do we really need bureaucrats threatening to sue you if you don't employ enough people without high school diplomas?  Or regulators who say you can't build on a piece of land because some stupid salamader would be put out.

Something else that would probably help would be a return to a strong dollar policy.  When we devalue our currency, foreign investors have less incentive to invest their cash here.  If an investment is up 10% and we devalue by 10%, it's a wash for them.  And god forbid the investment goes down in value or they are punished double for their trouble.  I hope that when Romney is elected, he fires Ben Bernanke immediately and puts someone in charge who actually cares about the dollar.