Dow 36,000

Brad DeLong produces the following chart:


The Dow-Jones Industrial Average has spent 25 of the past 40 years–62%–between 800 and 1250 or between 8000 and 12500. These ranges comprise roughly 25% of the (logarithmic) total range of the Dow as a function of time.

It really looks like there may something special about the nominal value of a 1 followed by a bunch of zeros.

This is disturbing to me as an economist.

This seems like a proposition we could test by looking at other stock indexes. Nor do I really see why it should be all that shocking. We understand that expectations about market participants’ future behavior are relevant to rational market behavior. And it’s well known that decimal counting systems have an important role in human psychology. The tendency of goods to be priced at $9.99 rather than $10.01 is pretty well-understood.

Meanwhile, countries have been known to conduct their monetary policy in part by lopping off zeros. You’re in a situation where you’ve experienced a lot of inflation over the past twenty, so instead of $1 being equal to 600 francs, it’s now equal to 6,000 francs. To curb the inflation, you need to take some dramatic steps in “real” policy. But creating a “new franc” such that 1 new franc is equal to 1,000 old francs can also plausibly be part of the solution — it changes people’s thinking, and it symbolizes the new determination.

Maybe along these same lines we need to arbitrarily re-mark the nominal values of all our stocks, so that the DJIA will be equal to approximately 36,000 (to pick an arbitrary number) and then we can watch it slowly drift upwards until it gets into the 100,000 range. I’m not familiar enough with the workings of the system to say exactly how you would do that as a technical matter, but surely it can be done — it would just be a question of changing the meaning of labels.