value of the stock is $50 today and will be $5,000 ten years from now, and the rest of the market prices it at $50 today, then I could earn insane expected returns by investing at $50 today. Thus, I don’t think the market would price it at $50 today.
Everyone gets the insane nominal returns after ten years are up (assuming central banks target inflation), but after the initial upheaval at the time of the announcement there is no stock that gives more insane returns than other stocks, there are no arbitrage trades to drive the price up immediately. For nominal prices of stocks, what happens in ten years is going to look like significant devaluation of currency.
If a $5,000 free design car (that’s the only thing in our consumer busket) can suddenly be printed out of dirt for $50, and central banks target inflation, they are going to essentially redefine the old $50 to read “$5,000”, so that the car continues to cost $5,000 despite the nanofactory. At the same time, $5,000 in a stock becomes $500,000.
(Of course this is a hopeless caricature intended to highlight the argument, not even predict what happens in the ridiculous thought experiment. Things closer to reality involve much smaller gradual changes.)
Do you know anything about the state of evidence re: to what extent this is happening and/or driving stock returns? I’m not sure how you’d pick this apart from other causes of currency devaluation.
Everyone gets the insane nominal returns after ten years are up (assuming central banks target inflation), but after the initial upheaval at the time of the announcement there is no stock that gives more insane returns than other stocks, there are no arbitrage trades to drive the price up immediately. For nominal prices of stocks, what happens in ten years is going to look like significant devaluation of currency.
If a $5,000 free design car (that’s the only thing in our consumer busket) can suddenly be printed out of dirt for $50, and central banks target inflation, they are going to essentially redefine the old $50 to read “$5,000”, so that the car continues to cost $5,000 despite the nanofactory. At the same time, $5,000 in a stock becomes $500,000.
(Of course this is a hopeless caricature intended to highlight the argument, not even predict what happens in the ridiculous thought experiment. Things closer to reality involve much smaller gradual changes.)
Hmm, but what if everything gets easier to produce at a similar rate as the consumer basket? Won’t the prices remain unaffected then?
This makes sense!
Do you know anything about the state of evidence re: to what extent this is happening and/or driving stock returns? I’m not sure how you’d pick this apart from other causes of currency devaluation.