Right, 1971 is where the mess really started and with Nixon<quoted text>
Go back to 1971 when Nixon ended the Bretton Woods system where foreign countries could no longer convert (redeem) their U.S. dollars for gold. Nixon essentially broke all ties between the dollar and gold and gave the government, with the federal reserve as an accomplice, the ability to expand the money supply infinitely. This also allowed the the government to start running huge deficits because the money was no longer backed by anything.
Now, go look at a chart of the S&P 500 starting around 1971. It was trading below 200. From there it pushed ever higher into March of 2000 at a peak of 1527, where the bubble then popped and crashed. Since then, we had a higher high in 2007, and , currently, we are working on another one.
You might say that the economy expanded tremendously during that time (1971-2000). Well, I can't deny that, but one must ask why it expanded, not including population growth. The main reason the economy expanded was the massive expansion of the money supply. If I could post a chart here to illustrate it, I would. Money supply is controlled initially by the Fed and then secondarily through the fractional reserve banking system. All money starts out as a loan. The boom of the 90's was fueled by debt. Everything comes from debt. In fact, our money is actually backed by debt. The Fed controlls all this. Think of the Nasdaq bubble that popped in 2000 and the recent housing bubble. These bubbles were spawned from the Fed and they were really part of a bigger bubble known as a debt bubble or debt super cycle. They popped because they were created from debt, they were simply inflated with cheap money, they had no real value.
The collapse of 08' was nothing but the system trying to deleverage, same with the Nasdaq bubble in 2000. Another name for it is deflation. Both bubbles popped because the Fed started raising interest rates. Remember that the Fed is basically incompetent and they always do too much or too little. They are playing God and don't really know what the hell they are doing.
So, basically, I will stick with my belief that the stock market is nothing but a gauge of how much liquidity is in the system at any given time. Now, essentially, you could say the same about the economy in general. When liquidity is added, the economy expands; when liquidity is taken out, the economy shrinks. However, the stock market is a better gauge or proxy because you can visualize it as a simple index - S&P 500 - with price levels.
Basically, you got several idiots led by Bernanke who are trying to micro manage the entire economy by manipulating interest rates and money supply.
I wish I could explain this better, but I don't have time and it really is a difficult thing to try to explain because it is very complex and I have never really been that good at explaining comlex things.
Nixon Ends Bretton Woods International Monetary System
August 15, 1971: A Date Which Has Lived In Infamy
Executive Order 11615 - Providing for Stabilization of Prices, Rents, Wages, and Salaries
Bretton Woods system