IF WE WERE IN CHARGE
With regard to equity market valuations, other factors equal, as the capital base erodes, so does aggregate corporate profitability. Fewer factories = fewer profits. That said, if there is inflation, then the price level and headline revenues may continue to increase, but real economic profits will nevertheless decline. Even if shrinking capacity results in stable price margins, investors should be wary about buying into an eroding capital stock, which is what we have at present. But if margins are under pressure due to soaring input costs, then the combined impact on corporate profits, over time, could be unusually severe.
