Goldilocks Has Real Legs; Most analysts think there is something irrational about the way the world is working now. It's as if they skipped the lessons of the 1960s.(global economy)

Byline: Ruchir Sharma (Sharma is head of global emerging markets at Morgan Stanley Investment Management.)

Financial markets and economic conditions continue to defy conventional wisdom. The global economy refuses to slow down, powered by the re-emergence of large developing nations and a resilient U.S. economy. Inflation is well behaved despite rising commodity prices. Real long-term interest rates seem firmly anchored at about 2 percent. Credit spreads across the spectrum remain tight despite calls for an imminent reversal. Investors flush with cash have high-risk appetites.

Welcome back to the 1960s.

The economic parallels to that decade are striking and deep. Yet somehow, most financial analysts think there's something unprecedented and irrational about the way the world is working now. It's almost as if they skipped economic-history lessons on the go-go '60s. With another growth scare roiling global financial markets over the past few days, this may be as good a time as any to soak in that decade.

If the 1960s is used as the relevant historical template, then a lot of what's going on in this decade makes perfect sense.

The pace and breadth of the global expansion then was similar. With Japan and Germany on the revival path, the forces of globalization and related disinflation were at work. In turn, productivity levels were rising and real interest rates were low. At that time--as is the case now--productivity growth in the United States averaged a solid 3 percent.

High productivity meant record profitability. Just as in recent years, corporate America of the 1960s turned in profits averaging 10 percent of GDP. Strong productivity growth helped companies weather the impact of rising commodity prices. Investors didn't demand high interest rates, as they were confident that inflation would remain well contained due to globalization and technological advances. The U.S. 10-year Treasury bond oscillated around 5 percent for much of the 1960s as well. The business cycle was more muted that decade, allowing businesses to plan with more certainty and take on greater debt.