Since the early 2000s, the world has navigated the dot com aftermath, the global financial crisis, the eurozone sovereign debt crisis, a pandemic, multiple wars, and the most aggressive monetary tightening in forty years. Yet equity markets, particularly in the United States, sit near all-time highs.
At first glance, this seems puzzling. Economic growth in developed economies has been modest. Productivity trends have been lackluster. Corporate earnings have grown, but not at a pace that intuitively matches the rise in equity indices. What, then, explains the surge?
A shrinking measuring stick
The uncomfortable truth is that a large portion of these nominal gains is a monetary illusion — a reflection not of growing wealth, but of a shrinking yardstick. We are not witnessing an explosion in the intrinsic value of companies; rather, we are witnessing the rapid debasement of the currencies used to measure them. When we say that equities have "gone up," we are measuring their price in currencies — dollars, euros, pounds — that have themselves been systematically debased. The yardstick has changed. And when the yardstick shrinks, everything measured in it appears to grow.
Consider a simple, tangible example. In France and Germany in the late 1990s, before the euro's introduction, a café au lait at a Paris or Frankfurt coffee shop cost roughly 6–8 French francs or 2–3 Deutsche marks — equivalent to about €0.90 to €1.20. Today, that same cup of coffee routinely costs €3.50 to €5.00, and considerably more in central Paris or Munich. The coffee has not improved, it has not become three times “better”. What has changed is the purchasing power of the currency you hand over the counter. It has lost its value.
The same is true in the United States. In 2000, a standard diner coffee cost around $1.00. Today, it costs $3 to $5. Movie tickets have more than doubled. A median house in America cost about $165,000 in 2000; it now exceeds $400,000. These are not signs of abundance — they are signs of monetary erosion.
So when investors celebrate that equity markets have "risen" by several hundred percent since 2000 (with most of the gains having occurred over the past 12 years), they should ask: risen relative to what? Relative to a fiat currency that has lost more than half its purchasing power over that same period. Much of what investors call gains are, in real terms, the market simply treading water against the rising tide of monetary expansion. The better framing is not that stock prices have gone up — it is that the dollar and the euro have gone down. Reframing the conversation in such a way is important. Saying that equity markets have increased dramatically since 2000 suggests spectacular wealth creation. Saying that the dollar or the euro have lost a significant portion of their purchasing power suggests a defensive repricing of stocks in the face of ongoing monetary expansion.
When the supply of money increases faster than the supply of goods and services, the price of those goods and services must rise to compensate. Stocks—representing ownership in productive, real-world companies—are simply the first to "reprice" to the new monetary reality.
Read Guy Wagner's full article "The Great Monetary Illusion: Why equity markets soar in a fragile world".