Look inside!   -  Free 40-page preview includes
full Table of Contents, Preface.

click image to look inside
The Equity Premium Puzzle
Intrinsic Growth & Monetary Policy

by Robert Shuler

"Getting these questions right [makes] a profound difference in the lives of nations and their people. ... Suppose that the short term interest rate that was consistent with full employment had fallen to -2 or -3% sometime in the last decade.  Then what would happen?"
- Larry Summers, at IMF Economic Forum, Nov. 8 2013


Robert combines 50 years investing experience with the knack for finding hidden principles of a successful rocket scientist with half a dozen patents and several dozen publications in fields ranging from economics (corporate risk compensation, the equity premium) to physics (inertia & quantum gravity).  He lives in Texas with his wife Natasha.  Amazon author page  - BOOK, EVENTS & COMMENTARY BLOG

Available on Amazon (hardback / paper / Kindle)
Barnes & Noble (ePub)
Lulu (best place to order hardback)
Special Ed. - released Dec. 2014 - buy here:
eBook $3.99 - Paperback $6.48


Did floating currencies after 1971 cause inflation or deflation?
Does war cause spikes in inflation & declines in median income?
Does recession and unemployment cause war?
Did the gold standard or world trade cause 1929 depression?

The broken economy of Zo ... How would you fix it?


Perpetual Portfolio Simulator
(see book for instructions)
click here

Spreadsheet with setup for 2-pole filter for financial data:

click here

References (footnotes) with active links:
click here


 1 Zheng, L., "A Survey of the Empirical Difficulties of the Consumption Capital Asset Pricing Models," J. Mod. Econ. Manag., vol. 2, no. 1 (2013).  http://scik.org/index.php/jmem/article/view/665

 2 Welch, I., Goyal, A., "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," The Review of Financial Studies, v. 21 n. 4, 2008 

 3 At least this is the theoretical view of economists.  For example, see Zheng, L., "A Survey of the Empirical Difficulties of the Consumption Capital Asset Pricing Models," Journal of Modern Economy & Management, vol. 2, no. 1 (2013) available open access at http://scik.org/index.php/jmem/article/view/665 

 4 Mehra, R. and Prescott, E., "The Equity Premium A Puzzle," Journal of Monetary Economics, North-Holland, 15, 145-161 (1985)  http://www.academicwebpages.com/preview/mehra/publications/


truly fascinating - N. Mosley, UBS Sr. VP

page turner - B.G. Smith, NASA engineer

amazing sense of humor - C. Wolfe, investor/artist


The book presents a theory of necessity to adjust money supply to account for productivity if deflation is to be avoided. The monetary agent (central banker) is a market participant who is not profit oriented and can create money at will, and thus not be subject to rational investor constraints. The monetary agent's power is similar to or greater than investor power in the market.

Businesses leverage low interest rates enforced by the monetary agent to increase their activity, and growth rates, increasing employment to compensate for the reduced labor necessary to create the former level of goods and services. This leveraged difference in returns is the equity premium. Since productivity is a "rate" of production, even a one time increase requires a corresponding permanent increase not in the money supply itself, but in the "rate of increase" of the money supply.

Given the steady growth in productivity of the last 100 years, the world economy is now grossly under-stimulated and in danger of precipitous deflation. Both academic models and arguments based on historical events are presented, along with analysis of the meaning of money, investor behavior, and practical techniques for obtaining the equity premium in one's portfolio.


Do you believe the FED is ruining our money?

Most people think INFLATION will eventually force interest rates high.  But HENRY FORD and THOMAS EDISON thought they had invented something that prevents this, and that productivity would ruin the economy if money didn't change.  What do you think PRODUCTIVITY does to prices?


The equity premium was discovered in the late 1970s, surprisingly when stocks didn't seem to be going anywhere, by Rajnish Mehra and his advisor Nobel Laureate Edward Prescott.  Many people have tried to explain it using the standard tools of economics - higher returns are only justified by higher risk.  This explanation justifies about 1%, while in fact:

Market index stocks return
7% to 8% MORE than bonds

  • Do you believe bonds are much safer than stocks?  Individually maybe, but over the long term bonds fluctuate with interest rates and are approximately as risky as index funds, justifying maybe a 1% risk premium.
  • Do you believe you can pick winning, market-beating individual stocks?  Maybe you can for 5 or 10 years, but over 20 years or more it is likely you will make some bad picks, and a group of stocks representing the whole market will grow faster.

GROWTH cannot be equalized by prices

Efficient markets try to level the playing field between all assets.  Rational investors will bid up prices until the returns are similar.  But to equalize by price, you must have an end date.  To actually get the equity premium you use a PERPETUAL PORTFOLIO  Do you know what it is and how it works?

 From the Book:

On the origin & history of money
“The IOU is money that is good only between two people.  ... What do you think is the earliest IOU we know of?  ... IOU's are older than writing.  In fact, shortcuts in the creation of IOU's are thought to have precipitated the invention of writing. ... In 1929 German archaeologist Julius Jordan dug a trench into the Inanna temple precinct in the ruins of Uruk, city of ancient Sumer, now in southern Iraq. ... he found a number of small tokens 'shaped like commodities of daily life: jars, loaves and animals.'

On monetary policy & FED tapering
Monetary policy must permanently adapt.  Rather than a question of the sustainability of a new monetary policy regime, we find a question of whether it is wise to discontinue an adaptation to productivity increases and associated deflation.”

 On working class transition to self-sufficiency
“Constantly reducing one's share of the pie leads to no pie. Liquidation of working assets is in my view the number 1, 2 and 3 problem of the working classes.”

 “The transition to investor self-sufficiency is not only doable, I know people who are doing it.”

 On wages vs. human value
“Using wages as a proxy for human value leads to the following error: maximizing wages without increasing value.  Working directly on value focuses us on creating new careers and pursuits with value that lasts long enough to be worth the investment.

On the causes of war
Extreme productivity creates massive displacement in the workforce, displacement being a nice word to substitute for "unemployment."  And almost all conflicts from WWII to the Cold War to the Arab Spring and the disaster in Syria arise from economic conflict and unemployment.  People are tolerant when they are not threatened.  And if they are not economically threatened, they are not threatened.

Pre WWII Germany is not a similar situation to the modern debt of weaker European nations, and the German paranoia about inflation is harmful in the current context.  Technically it was unemployment, not inflation, that caused extreme hardship in Germany, and it is unemployment in the weaker European nations that is being fostered by German monetary policy. ... Unemployment in Germany reached 33.7% in 1931 and 40% in 1932.  In 1933, the same year that Roosevelt took office and confiscated American's gold, repudiating the gold standard internal to the U.S., world trade fell to 1/3rd of its former value and Hitler came to power and repudiated the reparations.  Germany quickly reversed its economic fortunes and became a major industrial power.  But the political damage was already done, and it used its power to wage global war. 

The blind following of emotional attachments rather than the true historical meaning of money rooted in mutual exchange leads to mistakes in monetary policy - mistakes that have serious consequences.

Example of the transition to self-sufficiency
The transition to investor self-sufficiency is not only doable, I know people who are doing it.  Under current less favorable conditions, I know a schoolteacher whose salary never exceeded the mid-$60s at its peak who retired with almost $700k in index funds.  If she can do that, what can you do with your $140k income you are currently squandering on mostly material objects that will disintegrate over time?”

Copyright  2013 Robert Shuler - All Rights Reserved