5 ms·

This is mostly correct, but in an extremely unhelpful way. Inflation-adjusted CAGR over the past 30 years is 107%. During that time, the average P/E ratio

This is mostly correct, but in an extremely unhelpful way. Inflation-adjusted CAGR over the past 30 years is ~~10~~7%. During that time, the average P/E ratio of the S&P 500 (that's what I could easily find) has hovered pretty consistently around 15-20. So the rise in equity prices is, as far as I can tell, directly attributable to increases in earnings (as it should be; after all, theoretically, stock prices are discounted future cash flows). Directly adjust for money supply is not a particularly good way of measuring, well, anything. There's a reason talk about M1/M2/etc have mostly fallen out of favour: we realised that they don't really mean anything, and the numbers are mostly useless for crafting policy or analysing things we care about. Adjusting for inflation is the standard metric for good reason. That's a much better measurement of real economic growth (real in this context usually means adjusting for inflation, instead of money supply. Almost nobody does the latter). Money supply should grow with economic activity; it would be strange for a much larger economy to be measured relative to a much smaller relative money supply.

pdonis 3y ago
> Adjusting for inflation is the standard metric for good reason. That's a much better measurement of real economic growth By "inflation" here you mean something like "average price level", which of course is also skewed by changes in the money supply, according to standard microeconomic supply and demand. So it does not strike me as a good way to measure "real economic growth"; the fact that it is the usual method in all developed countries is a bug, not a feature. The right way to measure real economic growth is to, um, measure real economic growth: the actual quantity of goods and services produced. Yes, that will mean there is not a single number for "growth", but so what? A properly functioning economy does not need a single number for "growth". The fact that government micromanagement requires such a number is, again, a bug, not a feature. > the numbers are mostly useless for crafting policy For crafting the policy of central government micromanagement, yes. But central government micromanagement doesn't work. The Soviet Union spent most of the 20th century proving that. The fact that other countries have not yet gotten the memo is, once more, a bug, not a feature. > Money supply should grow with economic activity I understand that this is a common claim among mainstream economists, but first, that doesn't make it right (monetary expansion is a common feature of failed civilizations in human history, and to just blithely adopt it as policy is not wise), and second, "grow with economic activity" is not how the money supply in any developed country is actually determined. (There is also the fact that monetary expansion is equivalent to a wealth transfer to those who get the newly printed money from those who don't, which generally means enriching the already rich at the expense of everyone else.)
- e63f67dd-065b 3y ago
  > By "inflation" here you mean something like "average price level", which of course is also skewed by changes in the money supply, according to standard microeconomic supply and demand. That's the whole point -- CPI doesn't cares only about price levels over time, with as consistent of a basket of goods as we can get. It doesn't matter if price levels increase because of increased money supply, or supply chain shocks, or trade policy, or a whole host of other factors. Those are all incidental to the thing we're actually trying to measure. To put it another way, money supply is one amongst many other factors that we effects price levels, which we must adjust for when trying to measure economic growth over time. The 70s oil shock, for example, dramatically decreased economic activity, with almost no effect on money supply at that time. > So it does not strike me as a good way to measure "real economic growth"; the fact that it is the usual method in all developed countries is a bug, not a feature ... A properly functioning economy does not need a single number for "growth". The fact that government micromanagement requires such a number is, again, a bug, not a feature ... But central government micromanagement doesn't work. The Soviet Union spent most of the 20th century proving that. There are many quibbles amongst economists with GDP as a measure of the economy, and this is not one of them. The problems are manyfold -- it doesn't capture informal transactions, which is a big chunk of many developing economies. I think, however, you're labouring under a misconception here. There are very few areas of the economy in which the US government tries to micromanage, and even then, uses GDP as the key metric to do so. There are only a few places where the government does central planning, and in almost none of these cases are they even close to Soviet-style central production quotas. The few that come to mind are: military production (for obvious reasons), strategic stockpiles (eggs for vaccines, petroleum reserve, the infamous government cheese saga, etc). GDP played no part in deciding on any of the above. I don't think you quite understand how Soviet central planning worked. There would literally be a central planner who decided that "we will produce x nails this year", and that was that. The factory got their quota, and would produce the nails, with no regard if anybody's gonna use the nails on the other side, or what kind of nails they would want, or of what quality. The only part of central planning that was well-run was military procurement, since the military would regularly reject goods for being of substandard quality. The US got the memo that this was a terrible idea -- that was one of the objectives of the Cold War, in fact. I've heard many criticisms that the US is too capitalistic, but the "too much central planning" is certainly a new one. > I understand that this is a common claim among mainstream economists, but first, that doesn't make it right (monetary expansion is a common feature of failed civilizations in human history, and to just blithely adopt it as policy is not wise), and second, "grow with economic activity" is not how the money supply in any developed country is actually determined. Those failed civilisations in human history operated under completely different economies than modern ones, and comparisons are practically useless. There is good reason that no mainstream economist looks to return to the gold standard. Economists like to debate about monetary policy, but there is still some measure of consensus on how to manage it. The decision process is not "oh look GDP went up, we need to expand supply"; the supply of money is a means, not an ends. The goal here is to maintain stable monetary policy -- to maintain low inflation, high employment, and sustainable economic growth -- and money supply is merely one of many tools in the toolbox to achieve that goal. The easiest example to see is that money supply is currently contracting as the fed restricts credit conditions to fight inflation. Once again, money supply is a tool, one of many central bankers use to achieve objectives. > (There is also the fact that monetary expansion is equivalent to a wealth transfer to those who get the newly printed money from those who don't, which generally means enriching the already rich at the expense of everyone else.) That's ... not how this works? 2020 saw the largest expansion of money supply in recent history, and guess where all that money went? Right into the hands of ordinary americans. The fed doesn't print money and hand it out to rich people, you should read up more on how monetary policy functions. Very broadly speaking, monetary policy acts on broad factors -- mainly the target fed funds rate. Old econ textbooks will have discussions about reserve requirements and what not that modern economists have found to be not the main factors anymore, as far as I can tell modern money supply is controlled by open market operations and the myriad of central bank facilities. They effect demand for cash, which then in turn feeds into cost of capital decisions, which then flows into the rest of the economy. Wealth allocation mainly happens in the realm of fiscal policy, which is very much not controlled by central banks. That's the politicians' job, which is a whole different story. I've rambled long enough now, but the main idea is that you need to read more about how monetary policy actually works. You keep talking about government micromanagement, when the Chips act is the first time in a very long time we've tried anything close to such closely targeted industrial policy.
pdonis 3y ago
> Inflation-adjusted CAGR over the past 30 years is 10%. From the numbers given in the article, that looks like a not inflation adjusted value. If I plug a growth ratio of 20 over 33 years ($100 invested in the S&P 500 in 1990 becomes $2000 in 2023, the numbers given in the article) into the CAGR formula, I get 9.5%. And the article's numbers are not inflation adjusted, they are raw dollar values. If I assume an average inflation rate of 3% over the same time period, I get an inflation-adjusted growth ratio of 7.54 over 33 years, which if I plug into the CAGR formula gives 6.3%. (I also note that the article explicitly lists growth in the money supply as one of the reasons for the growth in equity market cap.)
- e63f67dd-065b 3y ago
  Huh you're right, I read the numbers on my portfolio calculator wrong. Inflation-adjusted CAGR from 1993 to 2023 is 7.09% (as calculated using Vanguard's total stock market fund, which closely tracks a broad market index).

This is mostly correct, but in an extremely unhelpful way. Inflation-adjusted CAGR over the past 30 years is ~~10~~7%. During that time, the average P/E ratio

pdonis 3y ago

> Adjusting for inflation is the standard metric for good reason. That's a much better measurement of real economic growth By "inflation" here you mean something like "average price level", which of course is also skewed by changes in the money supply, according to standard microeconomic supply and demand. So it does not strike me as a good way to measure "real economic growth"; the fact that it is the usual method in all developed countries is a bug, not a feature. The right way to measure real economic growth is to, um, measure real economic growth: the actual quantity of goods and services produced. Yes, that will mean there is not a single number for "growth", but so what? A properly functioning economy does not need a single number for "growth". The fact that government micromanagement requires such a number is, again, a bug, not a feature. > the numbers are mostly useless for crafting policy For crafting the policy of central government micromanagement, yes. But central government micromanagement doesn't work. The Soviet Union spent most of the 20th century proving that. The fact that other countries have not yet gotten the memo is, once more, a bug, not a feature. > Money supply should grow with economic activity I understand that this is a common claim among mainstream economists, but first, that doesn't make it right (monetary expansion is a common feature of failed civilizations in human history, and to just blithely adopt it as policy is not wise), and second, "grow with economic activity" is not how the money supply in any developed country is actually determined. (There is also the fact that monetary expansion is equivalent to a wealth transfer to those who get the newly printed money from those who don't, which generally means enriching the already rich at the expense of everyone else.)

e63f67dd-065b 3y ago
> By "inflation" here you mean something like "average price level", which of course is also skewed by changes in the money supply, according to standard microeconomic supply and demand. That's the whole point -- CPI doesn't cares only about price levels over time, with as consistent of a basket of goods as we can get. It doesn't matter if price levels increase because of increased money supply, or supply chain shocks, or trade policy, or a whole host of other factors. Those are all incidental to the thing we're actually trying to measure. To put it another way, money supply is one amongst many other factors that we effects price levels, which we must adjust for when trying to measure economic growth over time. The 70s oil shock, for example, dramatically decreased economic activity, with almost no effect on money supply at that time. > So it does not strike me as a good way to measure "real economic growth"; the fact that it is the usual method in all developed countries is a bug, not a feature ... A properly functioning economy does not need a single number for "growth". The fact that government micromanagement requires such a number is, again, a bug, not a feature ... But central government micromanagement doesn't work. The Soviet Union spent most of the 20th century proving that. There are many quibbles amongst economists with GDP as a measure of the economy, and this is not one of them. The problems are manyfold -- it doesn't capture informal transactions, which is a big chunk of many developing economies. I think, however, you're labouring under a misconception here. There are very few areas of the economy in which the US government tries to micromanage, and even then, uses GDP as the key metric to do so. There are only a few places where the government does central planning, and in almost none of these cases are they even close to Soviet-style central production quotas. The few that come to mind are: military production (for obvious reasons), strategic stockpiles (eggs for vaccines, petroleum reserve, the infamous government cheese saga, etc). GDP played no part in deciding on any of the above. I don't think you quite understand how Soviet central planning worked. There would literally be a central planner who decided that "we will produce x nails this year", and that was that. The factory got their quota, and would produce the nails, with no regard if anybody's gonna use the nails on the other side, or what kind of nails they would want, or of what quality. The only part of central planning that was well-run was military procurement, since the military would regularly reject goods for being of substandard quality. The US got the memo that this was a terrible idea -- that was one of the objectives of the Cold War, in fact. I've heard many criticisms that the US is too capitalistic, but the "too much central planning" is certainly a new one. > I understand that this is a common claim among mainstream economists, but first, that doesn't make it right (monetary expansion is a common feature of failed civilizations in human history, and to just blithely adopt it as policy is not wise), and second, "grow with economic activity" is not how the money supply in any developed country is actually determined. Those failed civilisations in human history operated under completely different economies than modern ones, and comparisons are practically useless. There is good reason that no mainstream economist looks to return to the gold standard. Economists like to debate about monetary policy, but there is still some measure of consensus on how to manage it. The decision process is not "oh look GDP went up, we need to expand supply"; the supply of money is a means, not an ends. The goal here is to maintain stable monetary policy -- to maintain low inflation, high employment, and sustainable economic growth -- and money supply is merely one of many tools in the toolbox to achieve that goal. The easiest example to see is that money supply is currently contracting as the fed restricts credit conditions to fight inflation. Once again, money supply is a tool, one of many central bankers use to achieve objectives. > (There is also the fact that monetary expansion is equivalent to a wealth transfer to those who get the newly printed money from those who don't, which generally means enriching the already rich at the expense of everyone else.) That's ... not how this works? 2020 saw the largest expansion of money supply in recent history, and guess where all that money went? Right into the hands of ordinary americans. The fed doesn't print money and hand it out to rich people, you should read up more on how monetary policy functions. Very broadly speaking, monetary policy acts on broad factors -- mainly the target fed funds rate. Old econ textbooks will have discussions about reserve requirements and what not that modern economists have found to be not the main factors anymore, as far as I can tell modern money supply is controlled by open market operations and the myriad of central bank facilities. They effect demand for cash, which then in turn feeds into cost of capital decisions, which then flows into the rest of the economy. Wealth allocation mainly happens in the realm of fiscal policy, which is very much not controlled by central banks. That's the politicians' job, which is a whole different story. I've rambled long enough now, but the main idea is that you need to read more about how monetary policy actually works. You keep talking about government micromanagement, when the Chips act is the first time in a very long time we've tried anything close to such closely targeted industrial policy.

pdonis 3y ago

> Inflation-adjusted CAGR over the past 30 years is 10%. From the numbers given in the article, that looks like a not inflation adjusted value. If I plug a growth ratio of 20 over 33 years ($100 invested in the S&P 500 in 1990 becomes $2000 in 2023, the numbers given in the article) into the CAGR formula, I get 9.5%. And the article's numbers are not inflation adjusted, they are raw dollar values. If I assume an average inflation rate of 3% over the same time period, I get an inflation-adjusted growth ratio of 7.54 over 33 years, which if I plug into the CAGR formula gives 6.3%. (I also note that the article explicitly lists growth in the money supply as one of the reasons for the growth in equity market cap.)

e63f67dd-065b 3y ago
Huh you're right, I read the numbers on my portfolio calculator wrong. Inflation-adjusted CAGR from 1993 to 2023 is 7.09% (as calculated using Vanguard's total stock market fund, which closely tracks a broad market index).