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In this question I'm using the Vanguard Total Stock Market Index Fund(VTSMIF), which for my purposes I find to be a sufficient indicator of the US market as a whole. (Please explain why this isn't an accurate indicator is that's the case.) I'm also using strictly the M1 money supply, as it most closely correlates to the stock market(and another source), and also because the increases in M2, M3, and MZM have been comparable over the time frame referenced.

In February, 2020 the VTSMIF was at $\\\$164.96$. At that time the M1 money supply was roughly $\\\$4,003,000,000,000.$ As of June 2020 the M1 money supply had been increased to $\\\$5,209,900,000,000.$ That's a roughly 30% increase in the money supply. At the same time, the VTSMIF had only recovered to $\\\$154.75$, or a ~6% decrease.

So we're looking at a 30% increase in money supply that, typically, directly ties to stock prices. I also don't think population increase in the time frame is a material factor, but please correct me if I'm wrong. Even if we assume no further increase in M1 money supply since June, and use today's VTSMIF value of (currently) %\$171.21$, we're looking at a ~4% increase in value, when historically we'd expect an increase in value closer to the increase in money supply.

I know there are myriad factors in play, these are unprecedented economic times, etc etc. But is it incorrect to say that despite slight upwards movement in USD value since February 2020, the stock market has actually lost a significant amount of real value, due to the drastic increases in money supply over the time frame? Assuming it's correct to state that, how would one calculate the actual loss of value?

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  • $\begingroup$ To say assets lost real value because of a change in money supply is a problematic assumption. If you want to make that assumption and you assume that change in value is proportional to M1 then this becomes an arithmetic question so it's off topic.1.04*(4/5.2) - 1 is negative 0.2 so negative 20 percent. $\endgroup$ – H2ONaCl Aug 12 at 2:43
  • $\begingroup$ I guess I was looking more for what other factors come into play. Sure the money supply usually correlates some, but for example, I saw an article in Bloomberg this morning about .6% increases in inflation for June & July. How can other data sources be combined to provide at least a cursory, realistic analysis? $\endgroup$ – TCooper Aug 12 at 16:22
  • $\begingroup$ The mainstream media have articles saying that in a pandemic it is hard to make economic measures so you might not want to rely on recent short term measures of inflation. $\endgroup$ – H2ONaCl Aug 13 at 21:27
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Increases in the money supply do not affect the real value of investments unless they lead to inflationary increases in the (quality-adjusted) prices of goods and services. Which this increase has not done. If you choose to measure the value of your investment as the proportion of the M1 money supply that it represents then sure, it has been devalued, but that’s a rather pointless and futile way to measure the value of investments.

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  • $\begingroup$ If this isn't what this increase has done, what has it done? Were the goods, stocks, and real assets held prior to the increase in money supply were so drastically overvalued in Feb USD this was a correction to the money supply to allow them to maintain their value in USD? I agree the value shouldn't be a percent of M1 supply, it should be what real goods/assets can be acquired with the money made from selling the stock. Maybe a better question is: "What effect has the 30% increase in money supply from Feb-June of this year had?" $\endgroup$ – TCooper Aug 11 at 19:54
  • $\begingroup$ @TCooper Most likely it has (partly) made up for a reduction in monetary velocity caused by the pandemic. The size of the economy is determined by both money supply and velocity, not just the supply. $\endgroup$ – Mike Scott Aug 11 at 20:00
  • $\begingroup$ Okay, so how does this change things as velocity increases again? Or is it just assumed that it won't change quickly enough to be of concern? $\endgroup$ – TCooper Aug 11 at 20:04
  • $\begingroup$ @TCooper Most likely thing is that the Federal Reserve scales back it’s quantitative easing programmes, or even starts to unwind them, in order to keep inflation under control. $\endgroup$ – Mike Scott Aug 11 at 20:08

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