Just a few thoughts on the possibility of markets beating inflation in the long, long term (say, hundreds of years). I am a theoretical physicist, not an economist, so please forgive my ignorance.
I was wondering what can we say about a market in the $t \to \infty$ limit if that market beats inflation when averaged over long periods of time.
It seemed to me like market caps would have to just keep rising and rising. And in fact, it is true that for the available data to me (since 1996) the S&S500 market cap has risen at essentially the same YOY rate as the index itself. Meanwhile, P/E ratios have not changed very significantly. This means that to sustain the trend in both stock price and P/E, company earnings must increase YOY by more than inflation.
In a world where the money supply stays constant, this would mean that eventually the earnings of any individual company would have to exceed even the total money supply, as $t \to \infty$. This seems like a very unrealistic situation. And, in fact, M2 has increased just as quickly as the S&P in total! Since 1996, M2's YOY rate is 7.0%, while the S&P grew at 6.7%. Meanwhile M0 grew by a whopping 10.1% YOY.
This leads me to preliminarily conclude that in fact the ever-increasing money supply is providing a mechanism for companies to increase earnings faster than the CPI each year. This suggests the view that the increase in markets faster than inflation is caused by the following phenomenon:
More and more money is created. Yet that new money is unevenly distributed, with much more of it going towards businesses than to consumers. For this reason, the CPI, which only measures a particular cross section of the market, grows more slowly than M2, and also more slowly than business profits. Thus the creation of money is a necessary process to keep markets rising faster than inflation, and if this were to cease, eventually the trend would be over.
I would be interested to hear anyone's thoughts - in agreement or not - with what is outlined above, especially the last sentence.