History: The Fourth Turning

One of the most significant aspects of generational research for me is its predictive ability. The cycle of generations described by Neil Howe and William Strauss in their books (starting with “Generations“) has an amazing predictive ability. Their book “The Fourth Turning“, written in 1997, predicts many of the events we have seen in the last few years with amazing accuracy. But this is not astrology or soothsaying. The predictions are based in strong social science that shows how the character of generations creates specific changes in society. Information about turnings can also be found on the Lifecourse Website.

Howe and Strauss point out that there are four cycles in history, that they call “turnings”, which are very similar to the four seasons of the year. It begins with the “High”, similar to Spring, a period in which life is growing, the days are getting longer and optimism abounds. The last High in the US was between 1946 and 1964. The next turning is the “Awakening” which is like the Summer, a period where life flourishes in many forms, perhaps to the point that things are a bit out of control. Our last Awakening the Consciousness Revolution from 1995-1985 when everything our society was based on during the High was questioned. The third turning is the “Unraveling”, similar to the Fall, when life dies back, the days shorten and things feel chaotic and uncontrolled. The last Unraveling in the US were the Culture Wars from 1986-2005, when society fell apart as it answered the questions from the Consciousness Revolution. The fourth turning is the “Crisis” which is most like Winter. During the Crisis the seeds that have been planted in the fall must survive through the short, cold days and life is bleak and unforgiving. We are in the Crisis now, and it will likely last until 2025. Those that survive the Crisis will enjoy warmth and promise of the coming Spring/High.

So, at the core of modern history lies this remarkable pattern: Over the past five centuries, Anglo-American society has entered a new era—a new turning—every two decades or so.  At the start of each turning, people change how they feel about themselves, the culture, the nation, and the future.  Turnings come in cycles of four.  Each cycle spans the length of a long human life, roughly 80 to 100 years, a unit of time the ancients called the saeculum.  Together, the four turnings of the saeculum comprise history’s seasonal rhythm of growth, maturation, entropy, and destruction:

• The First Turning is a High, an upbeat era of strengthening institutions and weakening individualism, when a new civic order implants and the old values regime decays. 
• The Second Turning is an Awakening, a passionate era of spiritual upheaval, when the civic order comes under attack from a new values regime. 
• The Third Turning is an Unraveling, a downcast era of strengthening individualism and weakening institutions, when the old civic order decays and the new values regime implants. 
• The Fourth Turning is a Crisis, a decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one.

Each turning comes with its own identifiable mood.  Always, these mood shifts catch people by surprise.

The Hole in Europe’s Bucket

By PAUL KRUGMAN

 From New York Times, 23 October 2011

If it weren’t so tragic, the current European crisis would be funny, in a gallows-humor sort of way. For as one rescue plan after another falls flat, Europe’s Very Serious People — who are, if such a thing is possible, even more pompous and self-regarding than their American counterparts — just keep looking more and more ridiculous.

I’ll get to the tragedy in a minute. First, let’s talk about the pratfalls, which have lately had me humming the old children’s song “There’s a Hole in My Bucket.”
For those not familiar with the song, it concerns a lazy farmer who complains about said hole and is told by his wife to fix it. Each action she suggests, however, turns out to require a prior action, and, eventually, she tells him to draw some water from the well. “But there’s a hole in my bucket, dear Liza, dear Liza.”
What does this have to do with Europe? Well, at this point, Greece, where the crisis began, is no more than a grim sideshow. The clear and present danger comes instead from a sort of bank run on Italy, the euro area’s third-largest economy. Investors, fearing a possible default, are demanding high interest rates on Italian debt. And these high interest rates, by raising the burden of debt service, make default more likely.
It’s a vicious circle, with fears of default threatening to become a self-fulfilling prophecy. To save the euro, this threat must be contained. But how? The answer has to involve creating a fund that can, if necessary, lend Italy (and Spain, which is also under threat) enough money that it doesn’t need to borrow at those high rates. Such a fund probably wouldn’t have to be used, since its mere existence should put an end to the cycle of fear. But the potential for really large-scale lending, certainly more than a trillion euros’ worth, has to be there.
And here’s the problem: All the various proposals for creating such a fund ultimately require backing from major European governments, whose promises to investors must be credible for the plan to work. Yet Italy is one of those major governments; it can’t achieve a rescue by lending money to itself. And France, the euro area’s second-biggest economy, has been looking shaky lately, raising fears that creation of a large rescue fund, by in effect adding to French debt, could simply have the effect of adding France to the list of crisis countries. There’s a hole in the bucket, dear Liza, dear Liza.
You see what I mean about the situation being funny in a gallows-humor fashion? What makes the story really painful is the fact that none of this had to happen.

Think about countries like Britain, Japan and the United States, which have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically.
Wouldn’t that cause inflation? Probably not: whatever the likes of Ron Paul may believe, money creation isn’t inflationary in a depressed economy. Furthermore, Europe actually needs modestly higher overall inflation: too low an overall inflation rate would condemn southern Europe to years of grinding deflation, virtually guaranteeing both continued high unemployment and a string of defaults.
But such action, we keep being told, is off the table. The statutes under which the central bank was established supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen. The broader problem, however, is that the whole euro system was designed to fight the last economic war. It’s a Maginot Line built to prevent a replay of the 1970s, which is worse than useless when the real danger is a replay of the 1930s.
And this turn of events is, as I said, tragic.
The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.
Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.
Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don’t expect it.
The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.

Hubris paved way to crisis

By DANIEL CLOUD

PRINCETON, New Jersey — To understand how we got ourselves into our current economic mess, complicated explanations about derivatives, regulatory failure, and so on are beside the point. The best answer is both ancient and simple: hubris.

In modern mathematical economics, many people in the rich world decided that we had finally devised a set of scientific tools that could really predict human behavior. These tools were supposed to be as reliable as those used in engineering. Having ushered scientific socialism into its grave at the Cold War's end, we quickly found ourselves embracing another science of man.

Our new beliefs did not stem from some new experiment or unexpected observation, the way a real scientific paradigm shift does. Economists do not typically conduct experiments with real money. When they do, as when the Nobel laureate Myron Scholes ran the hedge fund Long Term Capital Management (LTCM), the dangers often outweigh the benefits (a lesson we still don't seem to have learned.) And, since almost every observation that economists make turns out in a way that wasn't predicted, no unexpected observation could ever actually change an economic paradigm.

What really produced the change in economics that led to disaster was the simple fact that you could now get away with saying certain kinds of things in public. Some of us honestly thought that history was over. And after all, you can't have a final, utopian society without having a final, scientific theory of human behavior, together with some mad scientists or philosophes to preside over the whole thing.

The problem is that, no matter how "scientifically" these new beliefs were formulated, they are still false. Capitalism is, among other things, a struggle between individual people over the control of scarce resources. Like boxing and poker, it is a soft, restrained, private form of warfare.

Military strategists have known for centuries that there is, and can be, no final science of war. In a real struggle over things that actually matter, we must assume that we are up against thinking opponents, who may understand some things about us that we don't know about ourselves. For example, if profit can be made by understanding the model behind a policy, as is surely the case with the models used by the U.S. Federal Reserve, sooner or later so much capital will seek that profit that the tail will begin to wag the dog, as has been happening lately.

The truth is that such models are most useful when they are little known or not universally believed. They progressively lose their predictive value as we all accept and begin to bet on them. But there can be no real predictive science for a system that may change its behavior if we publish a model of it.

Markets might once have been fairly efficient, before we had the theory of efficient markets. If investing is simply a matter of allocating money to an index, however, liquidity becomes the sole determinant of prices, and valuations go haywire. When a substantial fraction of market participants are simply buying the index, the market's role in ensuring good corporate governance also disappears.

The formation of large bubbles in recent decades was partly a consequence of the commonness and incorrigibility of the belief that no such thing could ever happen. Our collective belief that markets are efficient helped make them wildly inefficient.

Despite this, over the course of the last 20 years, economists began to act as if we thought we could genuinely predict the economic future. If the universe didn't oblige, it wasn't because our models were wrong; "market failure" was to blame. It is not clear how we could know that markets were failing whenever they fell significantly, but believed that we had no business second-guessing them when they climbed. Nor is it clear how we all knew that LTCM's failure or the post-Sept. 11 malaise posed grave risks to the system, but could seriously doubt that the dot-com craze was a bubble.

We repeatedly rescued bubbles, and never deliberately burst them. As a result, our financial markets became a pyramid scheme. Moral hazard, we thought, could safely be ignored, because it is "moral," which, as every true scientist knows, just means "imaginary."

But a market is not a rocket, economists are not rocket scientists, and moral hazard is, in human affairs, the risk that matters most. The false belief that we can collectively see the future using science has led us all to make various binding promises about things in that future that no human being can possibly guarantee. A promise of something that we should know cannot be guaranteed is also known as a lie. That vast tissue of lies is now tearing itself apart.

Governments think we can stop this process by throwing money at it, but there are many reasons to believe that this won't work. The banking system is probably already past saving — many institutions simply aren't banks anymore, but vast experiments that didn't work out as predicted.

We could easily be "stimulating" and "rescuing" the economy for a rather long time, in ways that only delay the needed adjustment, before we are finally forced to allow the required creative destruction to occur. But that is not the real problem. The real problem is the pseudoscientific ideology behind today's crisis. A final science of man has no room for the unplanned and unpredictable recovery that is the only kind a capitalist economy can have after a crisis of this size.

If we cleave to the false security of a supposed science that isn't working, and forget about the philosophy behind it, ideas like personal responsibility and the right to fail, our leaders will very scientifically give us no recovery at all.