Inflation Boosts Venezuela's Stock Market to New Highs

The Venezuelan stock market is surging as their economy falls apart. Why? When your currency continues to weaken, the price of things skyrocket (including stock prices) giving the appearance of productivity and economic health.

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Consider Devaluation Sparks Chaos in Caracas

Over the weekend, there were signs that Mr. Chávez's slashing of the "strong bolivar" currency could create as many problems as it solves in Venezuela's economy, provoking a wave of anxiety that sent Venezuelans scurrying to spend cash they feared could soon be worthless.

At Caracas's middle-class Sambil shopping mall, lines at cashiers reached 50-deep. Carmen Blanco, a 28-year-old accountant, waited to buy a 42-inch flat-screen television she doesn't need because she already has one at home.

"It doesn't make any sense to keep my savings," Ms. Blanco said Saturday. "I'd love to see how things work in a normal country."

If the US market recovers from its current slump and starts to hit new highs (like Venezuela's), expect to hear every mainstream media pundit trumpeting it as a sign that confidence has returned to the market; that the economy is starting to recover since people are buying and consuming once again. Since most mainstream analysis of stock market performance fails to distinguish between nominal and real, inflation-adjusted, terms, an easy way to tell if what the media is saying is true is simply to look at the price of gold. If gold continues to go higher, most likely it's just an illusion.

For a chart of the S&P in real terms, click here.