6 ms·

One thing I've never understood is how stocks are expected to grow at ~8% annually indefinitely if the economy is expected to grow at ~3%.

koyanisqatsi 4y ago
It means other parts of the economy must shrink. Population is no longer increasing which means every percentage of growth in one sector is offset by losses in another. There are only finitely many people and each person can only be in one sector at a time vs the previous regime where population growth meant every sector could grow concurrently by hiring from a growing population. Modern capitalism requires an infinite supply of people to maintain economic growth. The model is entirely busted because it is at odds with physical constraints and dynamics of a finite planet. I personally consider the whole thing a collective delusion because infinite growth on a finite planet is a logical and physical impossibility. Unless everyone decides to live in VR where nothing matters then the economic models must at some point make a connection with reality and at that point it becomes obvious that the capitalist model of infinite growth is untenable unless there is a supply of people growing at a faster rate than whatever economic metrics are used to measure the real economy.
- twblalock 4y ago
  This is entirely mistaken. Wealth creation is not zero-sum. Per-worker productivity is not static. The carrying capacity of the planet is not static either.
  - koyanisqatsi 4y ago
    Have you personally done any work to increase the planet's carrying capacity? More specifically, what is its current capacity and how is it calculated? Seems like you would know this based on what you have stated.
- stocknoob 4y ago
  Do you think the economy is zero sum? Go back 50k years, all the current wealth must have been distributed among a mere 50k cavemen. Were they all billionaires? Quality of life must have been amazing for them. When you go into the woods and stack rocks into a house, you created value. What part of the economy shrank?
  - koyanisqatsi 4y ago
    How many jobs do you have? Like as a professional in some sector of the economy, how many sectors do you personally occupy? Are you a farmer that also writes iOS software? No, obviously not. Whatever job you do is fixed and it contributes a finite amount of economic value. Since the population is now decreasing there are fewer people, which means if all the economic value from everyone is added up then the total contribution will be less than another population with more people. It doesn't make sense to talk about zero-sum economics because economics is always a positive sum arrangement of work and specializations. The number of workers is the main limiting factor in any productive economy, every other measure is essentially an approximate proxy of that. The financial sector on the other hand is indeed a zero-sum system. If someone is making money then someone else must be losing it because there is a finite supply of dollars in the economy at any given moment so if the supply is fixed then the monetary economy is a zero-sum game. All of this is derivable from first principles but for some reason most people are constantly parroting some nonsense about wealth and zero-sums.
    - stocknoob 4y ago
      Even finance isn’t zero sum. The money supply is literally something that is managed. When you take a loan, the bank has created money, since the deposits are still on the books. When you buy insurance, you are getting security, insurance company is getting a premium, and you are both happy. When you take a loan and start a business, the bank makes money on the interest, and you (hopefully) make money because your business is providing more value than it was. You bought a new machine and make widgets 10x faster, etc. Also, people confuse money and wealth. One is bandwidth, the other is data. You use bandwidth to transfer data, which is what you care about, and its possibility for creation is basically limitless.
mellavora 4y ago
That was Bernake's innovation. Artificially low interest rates allowed stocks to grow faster than the economy for decades. However, it may be that stocks now need to re-value to match the value of the economy, i.e. give up that ~5% delta that they've compounded over the last few decades.
paulpauper 4y ago
This is easy to explain. Stocks prices are in large part dictated by corporate profits, which is not the same as GDP. Profits are returned to shareholders, GDP is not.
- hotpotamus 4y ago
  > Stocks prices are in large part dictated by corporate profits I've also worked for a company with negative profits and a positive stock price which is also one of those things that tends to confuse me. (I'm aware that I'm pretty obtuse, but it's not all an act - I really don't get how much of the modern economy works.) I understand that the expectation is that profits will turn positive/grow over time, but that would seem to require the ability to accurately forecast the future, which seems problematic. Way too much of the modern economy looks to me like the South Park "Underwear Gnomes" model which you see memeified sometimes - the step 1: steal underpants, step 2: ?, step 3: profit, thing.
- AshamedCaptain 4y ago
  > Stocks prices are in large part dictated by corporate profits Maybe the ones that pay dividends, or are very old and stable. The rest are primarily driven by the same forces that move the price of, say, Dogecoin.
  - eloff 4y ago
    Over the short term the stock market is a popularity contest. Over the long term it represents the present day value of future profits.
- eloff 4y ago
  How do profits grow 8% if the economy grows 3%. It does seem counterintuitive. This is the best answer I've seen: https://economics.stackexchange.com/a/21617/7263 https://economics.stackexchange.com/a/21617/7263
  - Jensson 4y ago
    They predicted that companies will be able to extract more value from workers in the future. In other words, they think that the top 1% will continue to get relatively richer at a faster rate, as long as that is true profits can improve without the economy improving.
deleted 4y ago
[deleted]
wardedVibe 4y ago
Piketty has a whole thing about this. When the return on capital is higher than the growth rate of the economy, that capital owns the whole economy in the long run.
reducesuffering 4y ago
There are a lot of different explanations in the comments without a mention of the glaring obvious reason: 8% was including inflation and 3% is current real gdp growth. REAL (not inflation) annual US stock market returns since 1972 was 5.92% [0] REAL annual US GDP growth since 1972 was... 5.95% [1] You can't make this up. Expect our current GDP growth (2-3%) as long term real returns. Anything extra is monetary inflation. [0] https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2022&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&asset1=TotalStockMarket&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-asset-class-all... [1]https://www.macrotrends.net/countries/USA/united-states/gdp-gross-domestic-product https://www.macrotrends.net/countries/USA/united-states/gdp-...

koyanisqatsi 4y ago

It means other parts of the economy must shrink. Population is no longer increasing which means every percentage of growth in one sector is offset by losses in another. There are only finitely many people and each person can only be in one sector at a time vs the previous regime where population growth meant every sector could grow concurrently by hiring from a growing population. Modern capitalism requires an infinite supply of people to maintain economic growth. The model is entirely busted because it is at odds with physical constraints and dynamics of a finite planet. I personally consider the whole thing a collective delusion because infinite growth on a finite planet is a logical and physical impossibility. Unless everyone decides to live in VR where nothing matters then the economic models must at some point make a connection with reality and at that point it becomes obvious that the capitalist model of infinite growth is untenable unless there is a supply of people growing at a faster rate than whatever economic metrics are used to measure the real economy.

twblalock 4y ago
This is entirely mistaken. Wealth creation is not zero-sum. Per-worker productivity is not static. The carrying capacity of the planet is not static either.
- koyanisqatsi 4y ago
  Have you personally done any work to increase the planet's carrying capacity? More specifically, what is its current capacity and how is it calculated? Seems like you would know this based on what you have stated.
stocknoob 4y ago
Do you think the economy is zero sum? Go back 50k years, all the current wealth must have been distributed among a mere 50k cavemen. Were they all billionaires? Quality of life must have been amazing for them. When you go into the woods and stack rocks into a house, you created value. What part of the economy shrank?
- koyanisqatsi 4y ago
  How many jobs do you have? Like as a professional in some sector of the economy, how many sectors do you personally occupy? Are you a farmer that also writes iOS software? No, obviously not. Whatever job you do is fixed and it contributes a finite amount of economic value. Since the population is now decreasing there are fewer people, which means if all the economic value from everyone is added up then the total contribution will be less than another population with more people. It doesn't make sense to talk about zero-sum economics because economics is always a positive sum arrangement of work and specializations. The number of workers is the main limiting factor in any productive economy, every other measure is essentially an approximate proxy of that. The financial sector on the other hand is indeed a zero-sum system. If someone is making money then someone else must be losing it because there is a finite supply of dollars in the economy at any given moment so if the supply is fixed then the monetary economy is a zero-sum game. All of this is derivable from first principles but for some reason most people are constantly parroting some nonsense about wealth and zero-sums.
  - stocknoob 4y ago
    Even finance isn’t zero sum. The money supply is literally something that is managed. When you take a loan, the bank has created money, since the deposits are still on the books. When you buy insurance, you are getting security, insurance company is getting a premium, and you are both happy. When you take a loan and start a business, the bank makes money on the interest, and you (hopefully) make money because your business is providing more value than it was. You bought a new machine and make widgets 10x faster, etc. Also, people confuse money and wealth. One is bandwidth, the other is data. You use bandwidth to transfer data, which is what you care about, and its possibility for creation is basically limitless.

mellavora 4y ago

That was Bernake's innovation. Artificially low interest rates allowed stocks to grow faster than the economy for decades. However, it may be that stocks now need to re-value to match the value of the economy, i.e. give up that ~5% delta that they've compounded over the last few decades.

paulpauper 4y ago

This is easy to explain. Stocks prices are in large part dictated by corporate profits, which is not the same as GDP. Profits are returned to shareholders, GDP is not.

hotpotamus 4y ago
> Stocks prices are in large part dictated by corporate profits I've also worked for a company with negative profits and a positive stock price which is also one of those things that tends to confuse me. (I'm aware that I'm pretty obtuse, but it's not all an act - I really don't get how much of the modern economy works.) I understand that the expectation is that profits will turn positive/grow over time, but that would seem to require the ability to accurately forecast the future, which seems problematic. Way too much of the modern economy looks to me like the South Park "Underwear Gnomes" model which you see memeified sometimes - the step 1: steal underpants, step 2: ?, step 3: profit, thing.
AshamedCaptain 4y ago
> Stocks prices are in large part dictated by corporate profits Maybe the ones that pay dividends, or are very old and stable. The rest are primarily driven by the same forces that move the price of, say, Dogecoin.
- eloff 4y ago
  Over the short term the stock market is a popularity contest. Over the long term it represents the present day value of future profits.
eloff 4y ago
How do profits grow 8% if the economy grows 3%. It does seem counterintuitive. This is the best answer I've seen: https://economics.stackexchange.com/a/21617/7263 https://economics.stackexchange.com/a/21617/7263
- Jensson 4y ago
  They predicted that companies will be able to extract more value from workers in the future. In other words, they think that the top 1% will continue to get relatively richer at a faster rate, as long as that is true profits can improve without the economy improving.

deleted 4y ago

[deleted]

wardedVibe 4y ago

Piketty has a whole thing about this. When the return on capital is higher than the growth rate of the economy, that capital owns the whole economy in the long run.

reducesuffering 4y ago

There are a lot of different explanations in the comments without a mention of the glaring obvious reason: 8% was including inflation and 3% is current real gdp growth. REAL (not inflation) annual US stock market returns since 1972 was 5.92% [0] REAL annual US GDP growth since 1972 was... 5.95% [1] You can't make this up. Expect our current GDP growth (2-3%) as long term real returns. Anything extra is monetary inflation. [0] https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2022&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&asset1=TotalStockMarket&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-asset-class-all... [1]https://www.macrotrends.net/countries/USA/united-states/gdp-gross-domestic-product https://www.macrotrends.net/countries/USA/united-states/gdp-...