Would the aggregate stock market rise with fixed money supply? Answer
Valyooo asks (http://caps.fool.com/Blogs/would-the-aggregate-stock/837014):
With a fixed money supply, would the aggregate stock market rise, and if so how?
First let me stipulate a few other conditions, see what happens, then work back to just your question.
Assume perfect forecasting of everyone's needs and wants and perfect forecasting of weather and other such natural events. Eventually we'd reach the Austrian theoretical state of the Evenly Rotating Economy, where there are no profits beyond the natural rate of interest, which is equivalent to the prevailing Time Preference (desire for present goods over future goods, all else equal). Read up on Austrian Theory if you don't get this or we'll have a *long* discussion!
Results: with no profits beyond the natural rate of interest, there would be no difference between investing in the bond market or the stock market. But then again, with all future events and needs known now, there would be no need for money at all! We would contract for what we know we would need in the future in exchange for whatever we produce ourselves, i.e., barter would actually be efficient with perfect knowledge. But assume we still use money as an artifact of when we were imperfect, plus the fact that it makes economic calculation possible (we may have future knowledge, but totalling the 'value' of heterogenous capital goods is still impossible without a unit of account). The market cap of the whole stock market would eventually be constant relative to population. If you assume no expansion into space, we would eventually find (or quickly since we have perfect knowledge) the Earth's capacity and stop population growth there, so the aggregate stock market value would stop, too.
But this ERE is not reachable. First, we have human limitations, so our knowledge is limited, and our needs and wants change a lot. So entrepreneurs make profits as they fulfill our needs (losses when they guess wrong), ever smaller profits as we approach the ERE, but long before we arrive, our wants (at least) change, so the equilibrium point changes, and entrepreneurs have new opportunities to make profits serving us.
In this process of meeting our needs, our wealth is increasing absolutely in total. Just look at how we live relative to 50 years ago. People in 1963 would be amazed at our electronics, at least (though wondering where our flying cars are--I blame 'free' government roads crowding out the need for them), people in 1913 would be amazed at 1963's aircraft, people in 1863 would be amazed at 1913's automobiles, people in 1813 at 1863's trains. The poorest among us in 2013 live with better hygeine, better diet, better longevity, better conveniences of all kinds than kings had in 1763.
Creating those convenience takes a lot of capital, most of which is probably owned by public companies. So my guess is that even with a fixed money supply, yes, the fraction of the economy's whole money supply invested in those public companies (i.e., the stock market) has grown to meet our desires for a better life, which we have achieved.
Will it continue to rise (in real terms)?
Unknown. In the future, we may reach a point of satiation, where we feel we no longer need the next newest thing (stimulated by smellovision?), or want to live even longer, but I think that is a long way off. So, we have quite a while of *potential* rise ahead of us.
But in the near term, our upward rise in quality of life is leveling off as liberties are lost. We may degenerate into oppressive police states that make the Iron Curtain countries look like libertopia. When it is no longer your choice how much health care you want to pay for, but are forced by taxes to pay and the decision of whether and how much you receive are left to death panels, our quality of life in that area will be lower. The profits of the health care industry will disappear and their market cap with them. Rising national debt means our children are born with government having already promised to wring from them hundreds of ounces of gold worth of their future production. Slavery is not conducive to prosperity.
Will we stop hiring thugs with guns to enslave our fellows, and thus enslave ourselves? If so, we may regain our upward march. If not, with nothing left over to save after government has wasted it, there will be nothing to invest. We will spend our income on desperate immediate needs and not invest in future comforts. Capital will be consumed in the process. We will find ourselves with a lower standard of living, and a lower aggregate stock market.
I didn't even have to refer much to a fixed money supply to see this. In part, that just makes the measurement easier. In part, flexible money supply is just a symptom of our flexible morals. Promises to repay in the future are changed in value by the whim of the central bank. When people are robbed by inflation there is less outcry than when they are robbed by taxes, which is less than when they are robbed by an individual. The criminals are getting smarter. The more they win, the more we lose. But if we can go back to honest money, we will thrive with honest contracts, and we will have honest growth in our living conditions.