Interesting take on using M2 as the deflator instead of CPI. The relationship you showed between nominal earnings and money supply really does look tighter than earnings vs inflation, which makes intuitive sense when liquidity drives consumption regardless of price movements. What I find compelling is the 2021 adjusted valuation you calculated at 22.5x versus the legacy 37x, that gap is massive and shows how much structural policy influnce can distort traditional metrics. The challenge I see is forecasting future M2 trajectories for forward looking portfolio decisions, but for historical context this adjustment seems way more useful than just assuming CPI captures everything.
I agree that projecting future M2 growth onto this is probably a step too far. But it probably is important context if you can make a compelling case that M2 growth will be materially above or below trend.
And absolutely, a 22x vs 37x reading would have been very useful for asset allocation decisions at the time.
Interesting take on using M2 as the deflator instead of CPI. The relationship you showed between nominal earnings and money supply really does look tighter than earnings vs inflation, which makes intuitive sense when liquidity drives consumption regardless of price movements. What I find compelling is the 2021 adjusted valuation you calculated at 22.5x versus the legacy 37x, that gap is massive and shows how much structural policy influnce can distort traditional metrics. The challenge I see is forecasting future M2 trajectories for forward looking portfolio decisions, but for historical context this adjustment seems way more useful than just assuming CPI captures everything.
I agree that projecting future M2 growth onto this is probably a step too far. But it probably is important context if you can make a compelling case that M2 growth will be materially above or below trend.
And absolutely, a 22x vs 37x reading would have been very useful for asset allocation decisions at the time.