Tuesday, September 23, 2008

Inflation adjusted S&P 500

By now readers should know that the real money supply has risen at about 6% annualized over the last 50 years. Nominal GDP has been slightly above that. Now how does that affect stock market returns? Considering that we are below the levels of 2000, and the amount of inflation that we have had, my guess was that the market is doing quite terribly.

Unfortunately I was right after conducting my analysis. The real annualized return of the S&P 500 when accounting for monetary inflation is.... 0%. That's right. The market has had no real return to investors over the last 58 years. It is simply a place to park money. Check the chart below.


J Wang said...

I've been checking out many inflation adjusted SP500 return charts and yours seem the most interesting as it point out that no real value can be extracted from the market. Curious, what methodology did you use to come up with the chart?


Jim said...

I used monetary price inflation via the True Money Supply statistics from the mises.org website. This is dedicated to the Austrian school of economics. The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions.

Basically, any value created by firms in the S&P 500 has been offset by monetary inflation from the US Treasury and Federal Reserve. CPI adjusted returns are not necessarily indicative of true inflation. Price (CPI) changes are a natural result of money supply inflation (i.e. more money chasing the same amount of goods leads to price inflation). In fact, the natural ebb in non-inflationary monetary policy is price deflation. This occurred during the 1800s to the early 1900s. The Federal Reserve's credit creation policy erased price deflation from free market capitalism. Instead we currently have a fiat money system where money is backed by faith in the credit system rather than gold. If you adjust S&P returns to gold & silver you will see a similar result.

Kenneth said...

I would be curious to see a version of your chart using the S&P 500 total return (dividends reinvested)...