In the year following Bush's dividend tax cuts, the Dow Jones rose 16%. When the tax cuts expire in a few months, will the market drop?

One method of evaluating stocks is that they are worth the present value of all the future cash flows. This can make dividend stocks particularly attractive to investors because they get paid rent or a dividend for holding a company. If conditions change and those future dividends are no longer expected, a stock can suddenly be worth a lot less. This is a large reason why we see stocks drop suddenly at earnings announcements or when companies revise outlooks.

The "Totally Informal Economics Roundtable" (TIER) met this past week -- the esteemed round table achieves a quorum whenever yours truly and my three astute economist friends from graduate school convene to discuss matters economic ... or to celebrate the birthday of one our school-age children, or for another social occasion. This week the topic was the global savings surplus.

Earlier on The FLY and on bloggingstocks.com, the TIER commented on the global savings surplus, or more-broadly, the large and increasing pool of global capital that's spanning the globe in search of return and yield.

It's hard for Americans to think in terms of a "savings surplus" with the U.S. posting a negative savings rate for more than a year, a savings rate well below appropriate levels for an advanced industrial economy, but the world is awash in capital, fed in part by savings. China, Japan, the European Union, and some petro-dollar countries have vast amounts of surplus savings. This fact, combined with a corporate capital base in the U.S. and abroad, has produced a multitude of unexpected consequences -- consequences that have lasted longer than many economists and analysts expected, the TIER agreed.

The first and foremost consequence, the TIER agreed, has been continued low interest rates for long-term bonds, mortgages, and certificates of deposit. Further, although recently released statistics from the Congressional Budget Office indicate the U.S. budget deficit in fiscal 2007 could drop to as low as $150 billion, five consecutive years of plus-$200 billion deficits normally should have led to a crowding-out effect on capital, resulting in higher long-term interest rates. Those high rates did not -- and have not -- materialized, the TIER agreed, due to that foreign savings surplus -- foreigners' willingness to buy U.S. Treasuries while spanning the globe for return and yield.