If you use M3 (total money supply) as the definition of inflation, which is a pretty bogus thing to do.
Why is it bogus? Because we have more people than we had in 2000. We have more houses, more cars, more computers, more phones. If M3 stayed the same, that would be deflationary, because the same amount of money would be spread over more stuff.
This is the correct answer and is actually somewhat visible if you also look at the DJIA and NASDAQ figures.
The S&P 500 and DJIA are limited to a fixed number of corporations. The NASDAQ is allowed to expand it's number of listed companies over time.
If you look at the NASDAQ figures it's able to show considerable and relevant growth, as more companies have listed. (Still not at 2000's peak, but much closer than the S&P or DJIA.)
> You don't really explain why the S&P rising slower than M3
Why do you think a constant fraction of every dollar the Fed creates should go into the S&P 500? Private markets, debt markets and bank reserves have soared since 2008, for example.
This chart is the financial equivalent of "a series of tubes."
Doesn't M0/1/2/3 have to keep up with population growth? I'm no economist, but dividing the S&P by M3 seems like a category error. In the US, we've got 130 million more people than we did in 1970, and 50 million more than we did in 2000.
>If you were using a computer 25 years ago, what about then? Made in USA or China?
I don't know. You tell me. You also didn't answer the question. Do you think the US economy shrank by 50% or not?
I see what you're getting at though. Basically, "since everything's made in china rather than the US, it's totally feasible that the US economy shrunk by 50% over 25 years". However, that's flawed for two reasons:
1. "manufacturing" =/= "the economy". As you might know, the US is primarily a services based economy. A quick google search says it accounts for 67% of the GDP.
2. raw gdp only dipped 3.6% in the 2008 recession. 50% is 14x that. I find it hard to believe that our economy experienced fourteen Great Recessions and never recovered.
>Last time I was at LAX 10 years ago it looked worse than a third world country airport
That's not hard to believe, considering that many oil states are loaded with cash and are "third world" (in the truest sense of the word). The third world is also filled with dictators who can fund glamor projects without taxpayer objection. See also: north korea.
> I did answer your question with another question, but that was perhaps too subtle for you.
that's called "dodging the question"
>Try to see the bigger picture. Broadly, over the last 25 years, much of the US economy has shifted overseas, not only to China. US infrastructure is crumbling.
The problem is that the points you bring up don't have any numbers behind them, so it's impossible to know their actual impact. You have two points. I can bring up two counter-points: growth of tech companies, and the fracking boom. I guess we're even now and US is alright?
>Yes the US is a "service based" economy, meaning arguably fake bullshit jobs
elaborate on this. Just because someone isn't working in a widget factory or a coal mine, it means that his job is bullshit? If companies are willing to pay people to do something, there's a very good chance that they're adding value, even if they're not participating in production directly.
>It's a fake foundation for an economy where everyone is living on borrowed money, due for a major correction, a massive shock causing the house of cards to collapse.
Well if you check household debt to gdp ratio you'll see that it's significantly deflated since 2008, so I guess we're actually fine then?
>The inflation adjusted index price is one piece of evidence that the US economy may be due for a severe correction, possibly worse than 2008.
Dunno man, if your "inflation adjusted" GDP numbers are to be believed, then the correction has already happened (or is still underway). A 10%-20% is generally considered to be the range for a "correction".
OK, wait. The original claim was that the inflation-adjusted SP500 has never recovered to its level in 2000. I said that M3 wasn't actually a measure of inflation. You responded that 1) yes it was (upthread a ways), and 2) "The inflation adjusted index price is one piece of evidence that the US economy may be due for a severe correction, possibly worse than 2008."
But if the SP500 (measured by M3) is below where it was in 2000 by a factor of 3 or so (eyeballing the chart in the article), and if M3 is a valid measure of inflation, then how is the inflation-adjusted index price saying that we're due for a severe correction?
You’re not considering the velocity of money in the economy. If a quadrillion dollar coin is printed and locked away in a vault which can only be opened by a formal proof of the Collatz conjecture, would there be any inflation?
Let's say two dollars exist in the world. Your stock is worth one of them in 2000. I quadruple the money that exists in the world to 8 dollars by 2020. The market says your stock is worth two dollars in 2020. Did you lose value, gain value, or stay the same?
For more thought experiments compare your stock value to coffee or a Big Mac.
Essentially no gain, it's all paper, your purchasing power stayed exactly the same even invested in one of the greatest "bull run" stock markets of all time.
The chart is misleading because it adjusts for inflation using M3, rather than the Consumer Price Index (CPI). People assess inflation by the prices they pay, not some monetary aggregate. Using CPI, the S&P 500 has recovered to its 2000 peak. Just as important, the owner of an S&P 500 index fund would have received dividends, so her total return would have exceeded inflation.
The caption at the bottom suggests why this misleading analysis is shown. The author is pushing crypto. "Invest wisely and you can maintain or increase your standard of life. Invest poorly and the road to serfdom is real. Invest in crypto"
> Isn't CPI politicized and doesn't accurately account for real cost of living changes?
There isn't a single CPI. Headline CPI is widely reported because it's approximately right for most people.
If you're doing inflation-sensitive planning, you should be using a more fine-grained metric. Predicting your personal cost of living changes using national core CPI is like aiming a gun with a compass. (That said, most people--when discussing inflation--aren't doing anything practical with it. For conversational purposes, headline is fine.)
> Isn't CPI politicized and doesn't accurately account for real cost of living changes?
CPI ain't perfect. Anyone can argue about the compensation of the basket and make points that it might understate some portions of household spending. And then there's confounds in the opposite direction: it doesn't take into account hedonics at all really. But it's not terrible, either: it's the best measure we have.
> Why do you think CPI is a better measure?
See sibling comments. If CPI doesn't quite accurately report purchasing power... M3 is nowhere close as a metric.
Hedonics (which I had mentioned) are an inescapable confound. We can't go back and live in 1990 with 1990s goods.
The cost of an equivalent quality of life (by our best reckoning) is measured in the various CPI. But people expecting more in life (safer products, more computing, etc) isn't exactly "inflation". And if we treat increases in quality of life as an increase of cost of living, we're really measuring something else.
Uh oh. If we take raw gdp (ie. not adjusted for inflation/cpi), and adjust it by M3 instead, we find that the economy has shrunk by nearly 50% since the mid 90s. That can't be right, can it?
This assumes a constant velocity of money. That's empirically false. Money supply can remain stable while prices soar or collapse solely on the back of velocity changes.
CPI includes housing and M3 is effectively never a good measure of inflation. People have this misconception that the supply of money is directly inversely proportional to the value of one unit of that currency. That is not how that works at all. Inflation is demand driven. When demand falls off a cliff you can have periods of deflation during which money supply increased significantly.
CPI covers Food energy housing etc because people aren’t just buying any one thing. We could argue about the correct mix to use, but M3 alone ignores population and economic growth etc making it a vastly worse measure of inflation.
This becomes really obvious if you look at M3 vs prices over long periods. If you have say 2x as many people and M3 is 2x the size then a 1$ candy bar that’s still 1$ somehow demonstrates inflation and increases in productivity. Except productivity per worker was unchanged only total economic output which is irrelevant to individuals.
I think about this a lot about one of Japan's indices: Nikkei 225. It peaked in 1989 (~33k) and has not yet recovered since their crash (currently ~27k)(ignoring inflation, just value)
Why is it bogus? Because we have more people than we had in 2000. We have more houses, more cars, more computers, more phones. If M3 stayed the same, that would be deflationary, because the same amount of money would be spread over more stuff.