One of the things that many people go through their entire lives without ever realizing is that conditions haven't always been the way they remember them to be. Due to the length of a typical lifetime and the number of those years that individuals are productive and have an impact on society, it's reasonable to think that someone in their mid-60s could retire today and look back at the last 40 years only to conclude that what they just experienced was normal. But, what if the last 40 years were anything but normal? What if, in the world of finance and economics, it was all just a big bubble?
One look at the chart below from this recent Wall Street Journal story and it becomes instantly clear that stock market valuations over the last twenty years have been nowhere near normal. In fact, what were deemed "generational lows" for valuations at the peak of the financial market crisis a year ago look like nothing of the sort over the broad sweep of time.
And when you consider what happened in the natural resource sector in the 1970s and then what followed in Japan in the 1980s, it's quite easy to come to the conclusion that, since the world left those last vestiges of sound money when Nixon closed the gold window in 1971, we live in a radically different world.
While some quickly dismiss ideas like this, reminding anyone who will listen that "correlation is not causation" while citing technological advances made during this time as just cause for the changes we've seen in financial markets, breakthroughs such as railroads and electricity a hundred or more years ago likely had a bigger impact on the world than computers, communication, and medical technology more recently.
The sad possibility that so few consider is that, what has happened in the last 40 years probably has much more to do with the financial system, credit, and debt than the technological advances themselves. A brief stroll through recent history might be helpful in seeing just how accustomed we've become to bubbles and, as if we don't know it already, how dangerous the financial world has become.
The Era of Disco and Inflation