With the Dow Jones Industrial Average reaching 10,000, Americans are feeling wealthier.
Unfortunately, roughly a third of the increase simply reflects the falling dollar, that American goods and assets are becoming cheaper to the rest of the world. Just as a lower dollar makes it more attractive for foreigners to buy American goods, it also makes it a better deal for foreigners to buy stock in American companies.
Over the course of this year, as the value of the dollar rose until the beginning of March, the stock market fell. As the dollar fell during the rest of the year, the stock market rose. While the stock market has risen by about 49 percent since its low in March, the dollar has fallen by about 20 percent against the Canadian dollar, 17 percent against the Euro, 15 percent against the Mexican Peso, and 11 percent against the Japanese Yen. For each of these currencies the dollar peaked right when the stock market hit its lowest value.
To get an idea how important these drops in the value of the dollar are, if the dollar hadn’t declined by about 17 (the amount it fell against Euro), the stock market would be only at about 8,600.
Obviously other factors have played a role in the swings over this year. For example, in early March, Larry Summers, the White House Economics adviser, blamed a fearful public for dragging the economy down and said that there was an "excess of fear" – the economy was no where near as bad at that time as many believed. President Obama's claims that "we were in the "worst financial crisis since the Great Depression" and that we had an "unprecedented crisis" may certainly have added to those concerns. In any case, part of the increase in stock values since March may simply have occurred because they were too depressed in March.
In any case, don't go feeling as if you have gotten back all your wealth over the last six months. The American dollar doesn't buy what it did just a short time ago. Whether it is imported cars from Japan or Korea or wine from France.
John R. Lott, Jr.is a FOXNews.com contributor. He is an economist and author of "Freedomnomics."