Sep 18, 2025
The P/E Ratio Deception: Adjusting Valuations for Currency Debasement
A P/E ratio of 25 sounds scary. But what if that's not the real story?
Traditional valuation methods miss a crucial factor: the dollar keeps losing value. Today's "expensive" stocks might be cheaper than they appear.
Why Traditional P/E Analysis Falls Short
Standard P/E ratios use today's dollars for both price and earnings.
The problem:
A 2008 dollar bought more than a 2024 dollar
Earnings are paid in cheaper currency
Price comparisons ignore purchasing power changes
Example breakdown:
S&P 500 P/E today: ~25
Historical "fair value": 15-18
Conclusion: "Market is overvalued"
But this analysis ignores 16 years of inflation and money printing.
The Real Inflation Story
Consumer prices tell part of the tale. The dollar lost massive purchasing power since 2008.
CPI inflation data:
2008 to 2025: roughly 50% cumulative inflation
$1.00 in 2008 = $1.50 in 2025
Every dollar today buys less stuff
Money supply explosion:
M2 grew 8-10% annually since 2008
2020-2021: 26.9% peak growth year
40% of all dollars created in two years
Your measuring stick shrank. The measurements grew as a result.
Recalculating P/E in Constant Dollars
Let's adjust that scary P/E ratio of 25.
Simple inflation adjustment: If the dollar lost half its value, today's P/E of 25 equals roughly 12.5 in 2008 dollars.
Money supply adjustment: With 8-10% annual M2 growth, each dollar's worth declined significantly. A nominal P/E of 25 might represent a real P/E of 15-18 in pre-expansion dollars.
The math works like this:
Take current P/E: 25
Divide by cumulative money growth: ~2x since 2008
Adjusted P/E: 12.5
Suddenly, "expensive" stocks look reasonably priced.
How Companies Profit from Money Printing
The "E" in P/E also benefits from inflation.
Corporate advantages:
Companies raise prices with inflation
Revenues grow in nominal terms
Profit margins expand during price increases
Real-world examples:
Many firms raised prices 20%+ in 2021-2023
They passed inflation costs to customers
Earnings hit record highs in dollar terms
The result? Both P (price) and E (earnings) rose with money supply. The ratio stays more balanced than it appears.
Earnings Inflation Explained
Think of a simple business example.
Coffee shop in 2008:
Coffee sells for $2
Monthly profit: $5,000
Stock trades at $50 (10x earnings)
Same coffee shop in 2024:
Coffee sells for $4 (doubled with inflation)
Monthly profit: $10,000 (doubled too)
Stock trades at $100 (still 10x earnings)
The P/E stayed the same. But both price and earnings doubled due to currency changes.
Corporate America works similarly:
Walmart's revenues: inflated by higher prices
Apple's profits: boosted by premium pricing power
Microsoft's earnings: grown with economic expansion
Companies adapt to inflation. Their earnings reflect the new dollar reality.
Real vs Nominal Valuations
The complete picture requires real purchasing power analysis.
Nominal view (misleading):
S&P 500: 4x higher than 2008
P/E ratios: elevated vs history
Conclusion: "Bubble territory"
Real view (adjusted):
S&P 500: 2.3-2.6x higher after inflation adjustment
P/E ratios: reasonable after currency adjustment
Conclusion: "Fair value given monetary expansion"
Gold standard test: The S&P 500 in gold ounces has barely moved since 2016. Stocks haven't outperformed real money - just paper money.
The Bottom Line
High P/E ratios don't mean what they used to.
When central banks print money, both stock prices and corporate earnings rise together. The ratio can stay stable even as nominal numbers climb.
Key insights:
Adjust valuations for currency debasement
Consider both price and earnings inflation
Use real assets as measuring sticks
Don't panic over nominal highs
Investment strategy: The danger isn't overvalued stocks. It's holding cash that loses purchasing power every year.
Stocks offer protection from currency debasement. Companies can raise prices with inflation. Cash cannot.
