Are Stocks Rising or Is the Dollar Declining?

In recent months, the stock market has reached unprecedented highs, leading to a debate about whether stocks are truly becoming more valuable or if the dollar is simply losing its value. This concept, often referred to as the "debasement theory," has been articulated by investors like Lee Roach. In a recent post, Roach highlights the U.S. government's structural deficit and the Federal Reserve's role in purchasing government debt, suggesting that asset prices are rising because the currency is being debased.

While Roach's perspective includes some factual inaccuracies, such as the notion that countries with high debt-to-GDP ratios inevitably face hyperinflation, he raises valid concerns about government spending and inflation. The U.S. government indeed struggles with spending issues, largely due to entitlement programs like Social Security, which are difficult to reform. Even significant tax adjustments would not fully resolve these funding shortfalls.

Roach argues that over time, inflation erodes currency value, and the best defense against this is to own real, productive assets. This strategy aligns with the advice found in financial literature, like Just Keep Buying, which advocates for continuous investment in income-producing assets.

However, the U.S.'s unique position as the issuer of the world's reserve currency offers it more borrowing and printing power than countries that have faced hyperinflation. Additionally, the current inflation rates in the U.S. do not resemble historical hyperinflation scenarios. From 2020 to 2026, the U.S. Consumer Price Index (CPI) increased by 29%, while home prices rose by 55%, indicating a decline in purchasing power but not to a catastrophic extent.

Interestingly, U.S. stocks have significantly outperformed inflation in recent years. For instance, the S&P 500 has increased by 143% from January 2020 to May 2026, even when adjusted for inflation. This growth is largely attributed to earnings growth rather than mere inflation adjustments, suggesting that the stock market's rise isn't solely due to dollar devaluation.

The question remains: Are stocks going up, or is the dollar going down? The answer is a bit of both. Historically, the U.S. has experienced both stock market growth and currency devaluation. The key takeaway is that while inflation has accelerated, it does not necessarily signal imminent hyperinflation. Instead, it underscores the importance of investing in assets that generate income.

The Strategy That Works Regardless of Market Conditions

Some argue that the stock market's rise is driven by the Federal Reserve's monetary policies. However, whether this view is correct or not, the solution remains the same: continue investing in assets. The strategy of "just keep buying" remains effective in counteracting currency debasement, regardless of the inflation rate.

Preparedness is crucial, and having a diversified portfolio of productive assets ensures resilience against both inflation and potential market fluctuations. Whether stocks rise or the dollar declines, consistently purchasing income-generating assets is your best strategy.

Happy investing, and thank you for reading. If you enjoyed this post, consider signing up for my newsletter.

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