Posts Tagged ‘Cycles’
History cycles

generations-and-the-fourth-turning

Our 2010 claim that “Strauss & Howe’s The Fourth Turning is looking more prescient by the day” is holding up well. As is the view that “we are currently witnessing the latest populist revolt against elitist authority” extracted from Lee Harris’s “The Next American Civil War”. It appears we may not be the only ones thinking along these lines:

President Trump’s chief strategist (Steve Bannon) is an avid reader and that the book that most inspires his worldview is “The Fourth Turning: An American Prophecy.”

The fourth turning takes a view that history is cyclical. It is made up of 4 cycles, which correspond to four human generations. The cycles are driven by human experience and have common themes, resulting in similar manifestations:

The cycle begins with the First Turning, a “High” which comes after a crisis era. In a High, institutions are strong and individualism is weak. Society is confident about where it wants to go collectively, even if many feel stifled by the prevailing conformity. Many Americans alive today can recall the post-World War II American High (historian William O’Neill’s term), coinciding with the Truman, Eisenhower and Kennedy presidencies. Earlier examples are the post-Civil War Victorian High of industrial growth and stable families, and the post-Constitution High of Democratic Republicanism and Era of Good Feelings.

The Second Turning is an “Awakening,” when institutions are attacked in the name of higher principles and deeper values. Just when society is hitting its high tide of public progress, people suddenly tire of all the social discipline and want to recapture a sense of personal authenticity. Salvation by faith, not works, is the youth rallying cry. One such era was the Consciousness Revolution of the late 1960s and 1970s. Some historians call this America’s Fourth or Fifth Great Awakening, depending on whether they start the count in the 17th century with John Winthrop or the 18th century with Jonathan Edwards.

The Third Turning is an “Unraveling,” in many ways the opposite of the High. Institutions are weak and distrusted, while individualism is strong and flourishing. Third Turning decades such as the 1990s, the 1920s and the 1850s are notorious for their cynicism, bad manners and weak civic authority. Government typically shrinks, and speculative manias, when they occur, are delirious.

Finally, the Fourth Turning is a “Crisis” period. This is when our institutional life is reconstructed from the ground up, always in response to a perceived threat to the nation’s very survival. If history does not produce such an urgent threat, Fourth Turning leaders will invariably find one — and may even fabricate one — to mobilize collective action. Civic authority revives, and people and groups begin to pitch in as participants in a larger community. As these Promethean bursts of civic effort reach their resolution, Fourth Turnings refresh and redefine our national identity. The years 1945, 1865 and 1794 all capped eras constituting new “founding moments” in American history.

 

In their 1997 book, “The Fourth Turning”, they predicted that “starting around 2005, America would probably experience a “Great Devaluation” in financial markets, a catalyst that would mark America’s entry into an era whose first decade would likely parallel the 1930s”. Their book incorporates the promise of renewal, before the cycle repeats.  One of the authors, Neil Howe, adds:

Despite a new tilt toward isolationism, the United States could find itself at war. I certainly do not hope for war. I simply make a sobering observation: Every total war in U.S. history has occurred during a Fourth Turning, and no Fourth Turning has yet unfolded without one. America’s objectives in such a war are likely to be defined very broadly.”

Thus far, at the grand strategic level, everything is proceeding exactly as I expected. There are blips on the trend, but the trend train is remorselessly rolling down the tracks. This also appears to accord with The Fourth Turning and The Next American Civil War.

 
Financial Cycles

Do you applaud the BIS for acknowledging financial cycles or to shake your head that such an article should be thought necessary?

Understanding in economics does not proceed cumulatively. We do not necessarily know more today than we did yesterday, tempting as it may be to believe otherwise. So-called

“lessons” are learnt, forgotten, re-learnt and forgotten again. Concepts rise to prominence and fall into oblivion before possibly resurrecting. They do so because the economic

environment changes, sometimes slowly but profoundly, at other times suddenly and violently. But they do so also because the discipline is not immune to fashions and fads. After

all, no walk of life is. The notion of the financial cycle, and its role in macroeconomics, is no exception.

No s**t Shirlock

This in all probability means moving away from equilibrium settings and tackling disequilibrium explicitly. In many respects, all this takes us back to previous economic intellectual traditions that have been progressively abandoned in recent decades.

You mean those classical economists had something sensible to say after all. Well I never.

If policy is unable to constrain the boom sufficiently and the financial bust generates a serious balance sheet recession, policies need to address balance sheet repair head-on. The overarching priority is to structure them

so as to encourage and support the underlying balance sheet adjustment, rather than unwittingly delaying it.

Take that Krugman, Bernanke et al. Your policy prescriptions have not and can not work. Reality always wins and your policies fly in the face of reality.

 

 
Money, Finance & Parasitoids

We examined the parasitoid nature of much of our privileged elite here. This post does the same for much of the financial sector. Money quotes being:

Here, instead, is the fable we’ve been offered: Sad as it might be for some workers, towns, cities, and regions, the end of industry is the unfortunate, yet necessary, prelude to a happier future pioneered by “financial engineers.” Equipped with the mathematical and technological know-how that can turn money into more money (while bypassing the messiness of producing anything), they are our new wizards of prosperity!

Unfortunately, this uplifting tale rests on a categorical misapprehension. The ascendancy of high finance didn’t just replace an industrial heartland in the process of being gutted; it initiated that gutting and then lived off it, particularly during its formative decades. The FIRE sector, that is, not only supplanted industry, but grew at its expense — and at the expense of the high wages it used to pay and the capital that used to flow into it.

and

For more than a quarter of a century the fastest growing part of the economy has been the finance, insurance, and real estate (FIRE) sector. Between 1980 and 2005, profits in the financial sector increased by 800 percent, more than three times the growth in non-financial sectors.

In those years, new creations of financial ingenuity, rare or never seen before, bred like rabbits. In the early 1990s, for example, there were a couple of hundred hedge funds; by 2007, 10,000 of them… Fifty thousand mortgage brokerages employed 400,000 brokers, more than the whole U.S. textile industry. A hedge fund manager put it bluntly, “The money that’s made from manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around.”

Wealth comes from production, not its taxation – by government or the financial sector. If money printing dilutes the existing stock of money in relation to goods, effectively “taxing” and devaluing existing money, then the creation of credit money by the financial sector has the same effect. If one is bad, then so is the other. Government might be a poor allocator of capital, but aggregating ever more resources to the financial sector is just as destructive.

The fact the finance can pay so well implies that its rampant growth may be even more damaging than that of government. Finance is more likely to attract the truly talented, who ought to be founding new Microsoft’s, Apples, Fords or curing cancer. Some of them are more likely to pursue such a socially beneficial path if the other option is to become a bureaucrat rather than a stinking rich financier.

Of course the rampant growth of the financial sector is facilitated by the blurring of money with different types of assets. This is an inevitable function of the lived experience of people during a period in the economic cycle. Those who live a different experience during a different part of the economic cycle form a different view. During depressions and crashes the true value of real “money” shines forth. Assets that appeared to be money, even ones as “safe as houses” become worth less, or even worthless.

Those who have recently lived through deflation are likely to instinctively hoard their fiat currency and behave quite differently to those who have recently experienced hyperinflation. Ditto for those with other “lived” experience. “Never a lender or borrower be” can seem obvious or stupid, depending on where people sit in the economic cycle.

Truly to know where we are going and how people and markets are likely to behave it is necessary to know where we have come from. Most economic and financial commentary completely ignores this. Is it any wonder it is so often wrong?