Note that the value of all index funds could easily be far far more than the sum of money in circulation. Money is only needed when the indexes are bought and sold, and so long as only a small percentage of indexes are being traded at any one time, you don’t need very much money for that.
I would expect that the total value of all companies in the world is already greater than the money supply.
Also note that central banks target a fixed rate of inflation. If GDP increases, total goods production increases, and so they have to increase the money supply by more to maintain the same rate of inflation. Thus this idea of indexes increasing in value but the money supply staying fixed is not a very realistic one.
Yes that makes sense, but is there some reason we should expect the total market cap to continue growing to huge multiples of the money supply (assuming continued technological improvement but fixed money supply)?
Added an extra section to discuss that. The idea of increasing GDP but fixed money supply just isn’t realistic, at least so long as central banks target a fixed rate of inflation.
Yeah, I’m being very hypothetical when discussing constant money supply. For the purposes of this discussion, just assume that somehow bankers decided to not increase the money supply.
Are you in agreement then that over the long term, the total world index fund must approximate the total growth in money supply (I guess assuming constant money velocity)? If not can you help me understand why not?
Also related: can GDP increase somehow if money supply is fixed and money velocity is fixed?
Note that the value of all index funds could easily be far far more than the sum of money in circulation. Money is only needed when the indexes are bought and sold, and so long as only a small percentage of indexes are being traded at any one time, you don’t need very much money for that.
I would expect that the total value of all companies in the world is already greater than the money supply.
Also note that central banks target a fixed rate of inflation. If GDP increases, total goods production increases, and so they have to increase the money supply by more to maintain the same rate of inflation. Thus this idea of indexes increasing in value but the money supply staying fixed is not a very realistic one.
Yes that makes sense, but is there some reason we should expect the total market cap to continue growing to huge multiples of the money supply (assuming continued technological improvement but fixed money supply)?
Added an extra section to discuss that. The idea of increasing GDP but fixed money supply just isn’t realistic, at least so long as central banks target a fixed rate of inflation.
Yeah, I’m being very hypothetical when discussing constant money supply. For the purposes of this discussion, just assume that somehow bankers decided to not increase the money supply.
Are you in agreement then that over the long term, the total world index fund must approximate the total growth in money supply (I guess assuming constant money velocity)? If not can you help me understand why not?
Also related: can GDP increase somehow if money supply is fixed and money velocity is fixed?
Yes in this hypothetical, stock indexes would stay roughly constant in nominal terms, but would rise just as fast in real terms.
And GDP will increase in real terms if money supply is fixed, but not in nominal terms.
Both of these are because we’d have deflation.
Thanks for helping clear this up! That makes a lot of sense.