International Review of Business, Trade, and Economics
A General, Scientific Unified Theory of Economic Growth, Asset Valuation and Return: A Common Necessary Constant Evidence for a Natural Law
Abstract
Julian Van Erlach
This paper posits theoretically and demonstrates empirical evidence for a mathematical natural law operating across growth economics and the valuation of major asset classes including the stock market, bond yield, gold and Bitcoin. A single constant: the long-run real per capita GDP growth rate of approximately 1.5–2% in developed economies determines the valuation reference point and real return of equities, long-term bond yield, gold, and Bitcoin across multiple monetary regimes spanning 200 years, in the case of gold, by presenting the only definitive solution to Gibson’s Paradox in a Jrl. Of Investing paper. The unification of macroeconomics and asset pricing under this constant constitutes a general theory that meets the criterion of natural science by positing a naturally observed constant and specific, quantitative, empirically testable predictions from publicly available real-time data and demonstrating that a risk premium is unnecessary and degrades empirical results. Further, risk does not appear as a factor in deriving GDP growth, and since asset returns must be anchored on growth, cannot be a factor in generalized asset valuation and certainly not return since asset returns cannot sustainably exceed GDP growth. The peer-reviewed published Finance journal papers stemming from this theory offer the highest empirical point-to-point valuation accuracy across published works for the stock market, long bond yield, gold and Bitcoin using real-time data and no back-testing or retrofitting.
The paper demonstrates that: GDP is the return on the total productive asset base of the economy, and leverages the global empirical fact that long term real per capita productivity growth is a constant and matches the economy’s natural long-term real return on assets which constant itself is a function of a biologically derived mathematical fact; the equity risk premium as conventionally measured is an artifact of an infeasible full dividend reinvestment assumption at the aggregate market level; Gibson’s Paradox — the century-old observation that consol yields varied with the price level rather than the inflation rate under the gold standard — is fully resolved by the constant real inherent yield requirement of gold and gold-denominated instruments; assets divide into inherent return classes, whose real value derives from their stock-to-world-GDP relationship, and fiat return classes, whose value derives from fiat cash flows priced by the generalized Fisher-Darby-Feldstein required yield; and inflation is a monetary phenomenon driven exclusively by government and central bank money creation in excess of real GDP growth, wherein changes in the rate of expected inflation and in the real yield each independently impact asset valuations — inversely for fiat assets and directly for inherent assets.