The 2007-2008 Financial Crisis was a formative event in many of the lives of our generation. Many lost jobs, even homes. The entirety of the American economic structure felt unstable, as though it was on the imminent verge of collapse. Yet, when you look back at the data, it almost seems impossible to miss the inevitability of it all. Let’s take the housing sector, for instance:

The above graph shows the rough correlation between housing prices and inflation. As the graph clearly shows, for much of the late 20th century the value of median family homes closely mirrored the consumer price index. And that is as you would expect: as Americans make more, they can afford more, and when they can afford more, prices go up accordingly.

Yet somehow beginning around the turn of the millennium, perhaps even slightly before that, the value of a median family home began to increase at a rapidly faster pace than did the consumer price index. We see a huge differential form between the two values. Economically speaking, its a bubble. And like the bubbles you used to blow when you were a kid playing in your driveway, bubbles eventually burst.

We see an exponentially increasing value of the median family home, while the consumer price index continues to follow its linearly increasing trend. When the growth becomes unsustainable, when the difference between the two values becomes simply too much for the market to believe any longer, the bubble bursts. There’s a rapid and sudden devaluation of one value to match the other. All of a sudden, a house is worth 1/2 what you thought it was, or 1/2 what you bought it for. It’s an enormous financial windfall, and one prone to produce and fuel a serious economic crisis that affects the nation at large. As we saw in 2007-2008 and the years that followed, that’s just exactly what happened.