That modernising societies experience a “demographic transition“–a change from high fertility and high death rates to low fertility and low death rates with an intermediate period of high fertility and low death rates–is well known. The likely reason is lags in adjusting to changes in death rates.
The price of children
Having children is a long-term investment within a limited (female) fertility window. When, as was the case in most times and places, death rates are high, there are considerable risks involved–either of death in childbirth or loss of a child before they procreate. Children became productive relatively quickly (at least in farming societies–not so much in foraging societies, who therefore invested considerable effort in keeping fertility rates down) and were the dominant provision for old age, so were generally good investments. Thus women start breeding relatively early and relatively often to have enough surviving-to-adulthood offspring. Hence, in farming societies, high death rates lead to high fertility.
medical [health] technology improves, death rates fall (dramatically). It takes a while before people believe that this unprecedented change will persist, so fertility rates fall much more slowly than death rates. Hence, the early stage of modernisation is a surge in population growth, with high fertility and low death rates.
The increased availability of technology tends to increase demand for the ability to use capital, hence investment in human capital rises. This also makes children more expensive in youth and more productive in adulthood–especially as capital increasing faster than labour increases the value of labour compared to capital, pushing up wages–reducing the breeding-for-old-age effect. (Indeed, state-provided pensions and private superannuation essentially eliminate any direct connection between breeding and provision for old age, creating the potential in countries reliant on state provision for old age for a demographically-driven fiscal collapse due to unsustainable rises in the dependency ratio.)
The rising demand for human capital encourages the education of women, which increases their income prospects, raising the foregone-income cost of children, lowering fertility rates. Making it difficult for could-be-mothers to get casual or part-time work, or otherwise have both a career and children, also raises the cost of children, lowering fertility rates. (So Japan’s mix of highly educated women, generous state pensions, domestically unhelpful husbands and strong disapproval of working mothers is a recipe for a low fertility rate. Just Catholic and Orthodox Europe’s typical mix of highly educated women, generous state pensions, domestically unhelpful husbands and highly regulated labour markets is a recipe for low fertility rates. Unless there are strong countervailing factors.)
So the reaction to falling death rates and rising costs of children is that people adjust their fertility rates downwards to “catch up” with lower death rates and reflect the rising cost of children. A tendency aggravated by expanding alternative provisions for old age. Hence the next stage in modernisation after the intermediate period of high population growth with, high fertility and low death rates, is low or negative population growth, with low fertility and low death rates.
The price of capital
Something similar occurs with saving (understood as deferred consumption). The high fertility, high death rate societies are low saving societies–indeed, children are a prime form of asset accumulation. The risks in capital income are generally very high, further discouraging saving. So interest rates are very high, with high risk premiums. Given the erratic nature of farming incomes, this often leads to high levels of “consumer”–i.e. not-starving–debt as farmers borrow at high interest rates to get them through a lean year. (Any regular pattern of debt forgiveness would also tend to drive up interest rates.) Debt bondage is therefore a recurring feature of monetised low-income societies as long-term bondage is of embedded-transactions (more here) low-income societies (i.e. manorialism with serfdom). A prime difference between the two being the monetised societies have public goods (such as protection) provided by money-taxing central authorities and the manorial societies by labour-service-extracting local lords.
Modernisation can be understood as continual, if erratic, positive supply shocks. Overall supply of goods and services expands as the cost of producing items drops, often dramatically. Incomes rise, but, due to the expected-income-effect (aka permanent income hypothesis), consumption rises more slowly as people take time to accept that the rise in income will continue. So, saving increases; an effect encouraged by falling general risk premium on capital income.
So, in a rising incomes environment, assets tend to increase faster than income. Which drives down the return on capital. Real interest rates are likely to be under continual downward pressure while assets with good capital gains are likely to be at a premium. As the general expectations of capital gains in an asset will generate rising demand for the asset, the situation is rife for asset booms and busts wherever the supply of an asset fails to adjust smoothly to demand for it. (Such as gold, or land-for-building-on in the Zoned Zones.) The uncertainty inherent in new technologies will also tend to generate asset booms and busts (pdf) as experience erratically interacts with expectations. (Or, to put it another way, as information catches up with expectations.)
Huge, continuing, rises in income. Continuing technological change. Restricted land markets. Low inflation. Welcome to the world of low (real and nominal) interest rates and asset booms and busts. With flights to safe assets when income expectations are poor.
Welcome to the C19th (pdf) (minus restricted land markets), when it was northern Atlantic economy incomes which were surging, railway mania hit the UK and US and British public bonds never seemed to outrun demand whenever income expectations fell. Welcome to now, when it is East and South Asian incomes that are surging. With housing booms and tech-bubbles. And, when income expectations fall, there is great demand for US Treasuries and gold. (Until there is not.)
Inflation expectations affect whether people hold money; but so do income expectations and keeping up confidence in the value of money merely affects the pattern of asset holding, it cannot abolish the consequences of surging demand for assets. Asset prices are all about expectations, because that is all we have about the future.