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Would the aggregate stock market rise with fixed money supply?

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June 10, 2013 – Comments (12)

Before I start the question I am really getting to, let me post what I am not talking about
1) Yes, some stocks would go higher as they become better and better, while other stocks would go down because they have a bad business model
2) I know there would probably never be a fixed money supply.  There definitely is not with paper money, but even with gold as money, as the aggregate prices fell over time due to innovation and efficiency, the increase in the relative value of gold would make it more profitable to mine until it hit an equilibrium at a higher supply
3) I know the stock market and economy don't have to be the same thing.  Overall lower prices and increased velocity is good regardless of what the stock market did
4) Assume a fixed p/e and a fixed global outlook.  Obviously day to day, month to month, fluctuations would happen regardless.  P/e will change, drought and war would hurt prices, etc.  I am talking about over the very long term (25+ years)
So my question is, would the AGGREGATE MARKET rise in value over time?  Over time, prices of everything fall due to efficiency with a fixed money supply.  Input prices fall, but so do output prices. So profits should stay the same.  More goods will be produced, society would be better off....but would the overall level of earnings stay the same? (Assuming a fixed P/E)
Thanks in advance

12 Comments – Post Your Own

#1) On June 10, 2013 at 9:47 PM, PainterPoker (21.46) wrote:

As usual, good question Valyooo... I'll be looking forward to some of the replies. 

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#2) On June 10, 2013 at 10:32 PM, VExplorer (29.67) wrote:

IMO: very unclear. Global apetite for risk and fixed income rates are out of scope balances questionable ander your assumption of fixed P/E. Demographic will fight with increase of efficiency. Very depending on legal enviroment as well. Public vs. private have had both advantages and disadvantages.

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#3) On June 10, 2013 at 11:06 PM, Valyooo (99.37) wrote:

 

Painter, thanks. It's a confusing world when you drill down deep sometimes 

Vexplorer, of course, but those things have a limit (100% private, 100% old people, etc). I'm talking about perpetual growth. 

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#4) On June 10, 2013 at 11:29 PM, Valyooo (99.37) wrote:

https://mises.org/daily/4654

 

that says no 

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#5) On June 11, 2013 at 1:34 PM, CCharing (88.94) wrote:

Not in dollar terms, of course not.

I have a feeling this is a leading question?  If efficiency and population continue to increase in aggregate though, the value of the money would deflate- because the supply is fixed it would represent a higher value (implying the same for equities assuming they are only priced in dollars).

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#6) On June 11, 2013 at 2:42 PM, somrh (88.61) wrote:

@valyooo,

I'm curious about George Weisman's formula:

P = D / S

It actually strikes me as something that the Austrians would object to instead of embracing. It looks like a simplification of the quantity theory of money (QTM) in that it ignores "velocity" and it treats prices as if it's not a vector

If you move the S to the other side and re-label it as Q you get:

PxQ = D

The left side is one side of QTM (although it's not being treated as a vector.) The right side is akin to "effective demand" and reflects something like GDP.

In any event, this is overly simplistic. Perhaps the conclusion is "roughly" right but a more detailed analysis would have to be performed. 

Consider the following issue:

What happens if firms, in "aggregate", choose to invest or distribute profits as dividends?

Well I'm guessing they would claim that if all profits are paid as dividends, then output would remain the same so prices would as well. That might be roughly correct (capital is typically not optimally utilized so it would be possible to increase output via population increases.) 

Alternatively, if they choose to invest there are some fundamental questions here. How much of the increase in productivity, as a result of the investment, goes to decreasing prices? Typically when managers make this assessment, they assume it all goes to the bottom line (which of course is false) but I don't see any reason why prices would have to decrease at any particular rate. 

My guess is that there's a "perfect competition" assumption somewhere in there so that no one can earn an excess rate of profit over any significant length of time. If companies were able to have a competitive advantage they would be able to earn an excess rate or profit and therefore the cash flow value of capital would be greater than the cost value of their capital (Investment Q > 1)

As a side note, I didn't read the entire article. Some of it was just plain silly nonsense which made me lose interest. See the section on "forced investing" for a good laugh... he seems to think it would be possible to "save" for retirement without investing... which makes me wonder how he gets his lower prices in the future if no one is actually "investing". *shrug*

As a side note, a stable PE (part of your stipulation) is probably not a good assumption as PE would be related to interest rates and I'm pretty sure the Austrians don't view interest rates as constant. (I suspect the guy in the article got this wrong too but I didn't read that closeley.)

You could probably rephrase your stipulation to say that "Investment Q = 1" and allow the numerator of Q to vary depending on interest rates. That still leaves open the whole competitive advantage part of the critique. 

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#7) On June 11, 2013 at 3:44 PM, Valyooo (99.37) wrote:

CCharing,

 

Not a leading question...just starting to realize that in order to make a bet on the stock market as an index rather than stock picking over the long term, there needs to be continous money printing 

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#8) On June 11, 2013 at 3:47 PM, Valyooo (99.37) wrote:

Besides a roughly stable price level, what about dividends? Could firms in aggregate be profitable? Or would revenues = cost in a fixed money supply?

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#9) On June 11, 2013 at 6:16 PM, Valyooo (99.37) wrote:

Also, what about a good catalyst for a country that affects business positively for international trade?  On a gold standard that would mean more gold flowing over which means higher stock prices.  But with a fixed money supply, foreign money coming over would just drive up the dollar, not increase the amount of money to drive up stock prices in America, right?

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#10) On June 11, 2013 at 8:46 PM, Melaschasm (57.85) wrote:

Assumptions:

Fixed Money supply

No change in the % mix of private, public, and government 'business'.

 Under these assumptions the driving factor for stocks would be changes in the investment type and rate.  As investors shift between stocks and bonds, aggregate stock prices would shift in response.  Changes in the portion of income which is invested, rather than spent would also swing the stock market to higher or lower values.

 

PS this is an excellent question!! 

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#11) On June 11, 2013 at 9:51 PM, Valyooo (99.37) wrote:

Thanks for saying it is an interesting question....sometimes I think about stuff too much and start to wonder if I am just insane (which I probably am) and missing something, or if it is really something to ponder, so I appreciate you letting me know that if I am insane, at least this isn't the proof haha

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#12) On June 12, 2013 at 12:11 PM, rfaramir (29.27) wrote:

 That mises.org article is the first poor one I've read, and I've read a lot there. Great stuff in general. Even this one has its good points, but I'd rather not wade through minefields (or worse) to find them.

Example from the article: "The fact that we have to save for the future is, in fact, an outrage."

It is, rather, a fact of life. A corollary to the fact that we have to consume to live, so we have to produce to consume, and since we in fact age, we cannot produce forever, so we have to save some of our production for those last years of consumption-only.

The author might have meant (and I'd agree) that the outrage is that we are forced to invest our savings in the stock market to outpace the inflation of the money supply, which makes 'fixed' investments losing propositions. Left alone (not having the integrity of our money violated by others), some would invest in stocks others in bonds (or really each have their own mix), depending on how they subjectively value safe slow growth versus risky higher growth. Instead, the Fed degrades both options, making us choose between somewhat safe slow negative growth versus very risky higher growth.

I think the overall point of the article is that inflation of the money supply does us no good and some definite harm, and I'd agree. But it says little to answer your question.

Here is my attempt to answer:

http://caps.fool.com/Blogs/would-the-aggregate-stock/837473

With a fixed money supply, would the aggregate stock market rise, and if so how?

 

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