"It's Different This Time" is Among the Greatest Dangers in Financial Markets; Sometimes in Software and Computing

“It’s different this time” is a classic example of the sort of thinking that can underpin financial bubbles. The phrase encapsulates the belief that "misconceptions" about a few “laws of economics” exist.

One might argue the same sort of argument has been made in the information technology business from time to time. In the capacity business, there was the Enron Broadband effort to create commodity exchanges for data transport.

Critics of the model were sometimes told "you don't get it." As it turns out, skeptics were right. In the IT business, a related sort of argument sometimes arises. You might hear talk of "paradigm shifts" or perhaps allusions to technological "singularity."

In the chip world, something analogous is the argument that "Moore's Law is dead."

Perhaps there is no clear harm in the expression of the ideas. But there are clear business consequences if leaders decide "it really is different this time."

Some might argue the classic relationship between interest rates and recessions has fundamentally changed. “It’s different this time” is the argument. That might imply we do not have to worry about recessions caused by high interest rate policy.

Others might argue the historic relationships between unemployment and inflation are “different this time.” That might imply we do not need to worry about employment rates and inflation.

Consider the argument that the relationship between interest rates and recessions (higher rates lead to recessions; lower rates promote growth) has fundamentally changed. Some now argue traditional tools such as rate hikes are less effective in combating inflation or preventing recessions.

Increased government intervention and changes in central bank mandates such as a focus on full employment alongside inflation control might reduce the effectiveness of interest rate policy. 

The argument is that increased activism by central banks (quantitative easing and forward guidance as examples) has arguably altered the relationship between interest rates and economic outcomes. 

Central bank interventions might  influence economic activity and asset prices through channels beyond just interest rates.

Some economists argue that the increasing importance of financial markets has weakened the traditional relationship between interest rates and recessions. Higher interest rates might not dampen demand for loans as effectively because alternative financial instruments exist.

Others suggest that asset bubbles can inflate and burst independent of interest rate changes, potentially triggering recessions, no matter what interest rate policy might be. 

Yet others might argue that globalization might make economies more sensitive to external shocks, automation could dampen demand for labor, and aging populations could reduce aggregate consumption, all potentially operating alongside interest rate policy. 

The traditional argument is that interest rates influence aggregate demand, investment, and therefore economic cycles, and that the relationship remains intact. 

Others might argue that such “it’s different this time” thinking is associated with asset bubbles, and the fundamental relationships between supply and demand still are intact.

Likewise, we might remember to be cautious whenever we hear that a paradigm shift is happening (it might not be happening) or that a singularity is nearing or chip progress rates must decline. Altering business strategy based on incorrect assumptions can be deadly.