Interest rates are a function of life expectancy.
The mean that people refer to isn't a number like a gravitational constant. It's a number made up by people because of the way people live and how they run their financial systems, their trade and how efficient and honest and reliable the system is.
So, the fact that mean P:E figures in the early 20th century, or late 20th century, are different from now is not of much value in saying where they should now be.
When life expectancy is short, people have a limited time horizon and their desire for higher interest rates is increased. Interest rates represent deferred spending on the part of the owner of the money and the risk that they might never get to spend the loaned money. When people don't have much expectation of the future, they require high interest rates and P:Es to hand their hard-earned money over to somebody else.
Now, things are stable, financial systems are robust and friction-reduced, fast and legally sound [by comparison with the historic mean]. So, unless you also reduce all those other factors to the historic mean, [which can't be done since the world has changed - though Pol Pot and Ted Kaczynski tried it and Osama's working on it], there is no basis to expect P:E or interest rates to revert to a historic mean.
Life expectancy a more obvious factor of a vast array of human factors which determine P:E and interest rate acceptability.
The world is made up of causal relationships. Mystics and the superstitious don't believe that - but nature gives them the death penalty [no wonder they tend to be the doom and gloomsters - they instinctively know that they are not long for this confusing world of spooks, mystical means and mean mystics].
If we accept that there are causal relationships, then the P:E and interest rates are a consequence of variables which people act on to maximize what they believe to be their interests. People obviously think differently about where the mean should be nowadays. They view their lives and investments and interest charges and future prospects differently from how people saw their lives back in the 1920s and 1930s. Life expectancy is just one of many ways in which they are quite right to view things differently.
Expecting the past to return is not a good bet. Driving a car by looking in the rear view mirror doesn't work either.
Certainly, we learn from experience and things that happened in the past recur - such as high speed skidding off a road. But if we look backwards, we see gravel roads and think we should travel at 30 miles an hour. If we look forwards, we see stretching to the horizon 10 lane super-highways and we can push the accelerator to the floor. Our mean speed of the past is zero guide to how fast we can now travel with greater safety and comfort.
With CDMA and Globalstar, we can have cyberspace everywhere on that superhighway.
The world is different from the past.
Major Paradigm Shift Happens,
Mqurice |
