Thinking Beyond Conventional Wisdom Cycles, Cycles, Cycles and more Cycles

Over a career of 50-years in the Financial Services Industry, one would expect that I might have “seen it all,” with respect to the many cycles in which we must operate. Changes in shorter-term factors and influences are as common as the changes in weather patterns from one season to the next. Yet, there are always more influential macro factors at play that provide us a view from above the short-term changes which, when observed, can be used to build a foundation upon which longer-term planning for one’s wealth business can succeed. A foundation that can provide a “stabilizing-effect” in long-term results relative to short-term market fluctuations that can prove violent at times. However, here I am over 50 years in the business and, most everyone I talk to agrees that today’s environment is, seemingly, more confusing than ever.

I believe the confusion can be clarified by our viewpoint that we are experiencing an interaction and confluence of several different cycles of change occurring at the same time. We might very well be at an intersection of changes, of which many have never experienced in our lifetimes.

This current environment, unfortunately, is generating more questions than answers; but without good questions it is impossible to find good answers. It might prove difficult, at this time, to determine which of the following cycles will be most impactful but, they all can present a meaningful impact on our lives and planning for one’s wealth businesses going forward. Below, are seven cycles (in no particular order) that we have identified as potentially having such impacts:

The Fourth Turning by William Strauss and Neil Howe

The Fourth Turning by William Strauss and Neil Howe, is a book written 1997. It was a follow-up of their 1991 book Generations. The Fourth Turning is an analysis and study of the characteristics of multiple, succeeding, generations and how each of those generations form a pattern of cultural identities. The last series of events known as the “fourth turning” happened in the 1930’s and into the 1940’s. A common theme of “fourth turnings” is the unraveling of “what has been.” They can be a periods of extreme cultural stress, conflict and change. Neil Howe refers to this cycle as “an era of unraveling.” A quote from chapter nine in the book explains it very well: “A Fourth Turning is a solstice era of maximum darkness in which the supply of social order is still falling but the demand for order is now rising.” This quote seems an extremely viable exclamation of the dubious series of events we have experienced in our most recent history of the past few years.

Interest Rates and Inflation

In 2022, The Federal Reserve System, by way of the Federal Open Market Committee (FOMC) increased the Federal Funds Rate at the fastest rate in the past four decades. In fact, the aggressiveness of which the FOMC increased the Fed Funds Rate was by way of the largest increase over the shortest period of time since the creation of the Federal Reserve System in 1913 (taking the fed funds rate from 0.25% in March of 2022 to the current rate of 5.25% as of May 3, 2023. The federal funds rate is the rate at which depository institutions trade federal funds with each other overnight, and is regarded as the rate upon which all other interest rates are based. This was said to be in response to the highest stated inflation rate in the last four decades. While interest rates have, in fact, increased “real” interest declined based upon the increased inflation. We are experiencing an extreme amount of noise as “experts” keep forecasting inflation and interest rates. This reminds me of a quote by John Kenneth Galbraith; “there are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

With regard to interest rates, is it highly unlikely that we will be returning to the extremely low to zero interest rates we have experienced since the financial crisis of 2008. This represents a pivot point and a change of which we have likely yet to experience the full ramifications. While the desperate times of the financial crisis of 2008 called for desperate measures, it is difficult to defend the decision to keep interest rates in a range of 2.50% to zero for such an extended period of time. The amount of borrowing at all levels (government[s], corporate, and personal), due to low interest rates, has risen to such excess, that it is difficult to envision a scenario in which the debt can and will be maintained and paid back. Especially, in the shadow of rising rates, which makes the servicing of this debt much more onerous and costly to the borrower. With regard to a possible secular inflation cycle; at this time, I prefer to look at the last cycle to see if it rhymes. Between the years of 1966-1982 we experienced multiple short-term business/inflation cycles. When comparing the world in which we live today, to that time in our history, there are some similar realities: reduced energy/oil output domestically, negative real interest rates, massive deficit spending, implementation and continuation of complete fiat currency, and social discourse with massive cultural changes. With the many similarities between then and now, and the addition of realities like reliance upon an overseas supply chain, increasing trade deficits, and a rapidly expanding money supply (read that as the creation/printing of new fiat monies) we could potentially be facing some head-winds in the way of economic recovery and expansion, as well as reductions in the rate of inflation.

Global Aging Population

Throughout the world, the most developed countries, with the largest and productive economies, are trending toward one commonality that cannot be ignored. Many of those such countries are experiencing an aging population demographic. Why is that important? As the population gets older, they do not have to buy new homes, furnish them, raise a family and buy more “stuff.” The number of active consumers is retracting on a global basis which means that economic growth will be driven by fewer consumers than have been partaking over the past 30-40 years. This creates an environment from which slower growth should be expected, and the counties with the most advanced “age of population” will likely experience the greatest impact from this developing circumstance, as population replacement levels have been declining over the past several decades in the developed world.

Eurozone nations, Japan, Russia, and China lead the list of fastest aging populations. It might come as a surprise that I mention China, but the slope of China’s aging population is actually faster than that the United States. Current projections indicate that the percentage of China’s population over the age of 65, will surpass that of the U.S. by 2035. China’s aging population percentage continues on a rising slope, in contrast to that of the United States which has a more flattening slope around 20-22% of population. Under these current conditions, and without the knowledge of future technologies and productivity enhancements, it will be extremely difficult for China and the U.S. to provide future economic growth at the same level as those two countries have over the past several decades. That begs the question: where will global growth come from, especially in light of declining fertility rates throughout the developed world?

Central Banking System – Debt Based Economy

The current Central Bank System in the United States has been in existence since 1913, being the third Central Bank to have operated in the United States since the country was founded. It might come as a surprise to some that the Federal Reserve is not, in fact, part of our federal government, but rather an independent entity within the government, created by an Act of Congress. While the intent behind the Board of Governors is to act as an independent government agency, the Federal Reserve Banks are set up like private corporations.

Among one of the many functions assumed to the Federal Reserve, as enacted by the Federal Reserve Act of 1913, was the authorization of the Federal Reserve System to issue Federal Reserve notes. These Federal Reserve notes, as stated in the Federal Reserve Act: “shall be obligations of the United States and shall be receivable by all national and member banks and Federal Reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.” The Act did not define “lawful money,” but in 1933, Congress changed the law so that all U.S. coins and currency (including Federal Reserve notes) became “legal tender” for all purposes. Further, it was at that time (1933) that the United States stopped using the gold standard, which is a monetary system by which a country’s currency or paper value is directly linked to gold. Hence, with the institution of the Federal Reserve note and removal of the full gold standard, the birth of the debt-based system was created, as the notes are promises of repayment to the holder and ultimately the issuer of those notes, the Federal Reserve.

From 1933 up until the early 1970’s, the United States used a combination fiat currency (a currency not backed by a physical commodity, but rather the government that issued it) and a partial gold standard. However, in August of 1971 Richard Nixon removed the partial gold standard for the U.S. dollar to “combat” inflation. Hence, since the early 1970’s we have had five decades of funny money, backed only by “promises.” The result of going off the partial gold standard and the end of the Bretton Woods international monetary system in 1971 has created an environment which allows the Federal Reserve to create fiat money out of nothing but a promise. On top of that, the banking system can leverage that money even more via fractional reserve lending, meaning a lending institution does not have to have full reserves on hand to match the money they lent to borrowers of the institution, money owned by the depositors. The result is an expansion of the debt based economic system created in 1933.

I have a US News & World Report magazine article from July 1, 1973 in which the author was warning about the total private and public debt reaching a $2.5 trillion level as of 12/31/1973. The fact that stood out to me, as stated in the article, is that total government debt list at $593 billion. Today, fifty years later, the US Debt Clock shows that the United States is saddled with over $30 Trillion in Debt, and those inside the D.C. beltway just agreed to increase that limit. This does not account for state and local government, corporate, and individual debt. There are many believe this is not sustainable and more importantly; How and when does it end? It is clear to me that the Fed has not met their mandates since its 1913 inception. Based upon a study of Fed history, I can only reason that they cause the problems, only to provide solutions that enhance the wealth of the private institutions that make up the Federal Reserve Banks. What will the next/new currency be if and when the seemingly unsustainability of fiat comes to its conclusion?

Deglobalization and the US

Over the last several decades globalization has been the dominant economic policy. The reasons are many, too many to describe briefly in this posting, but a few events that have provided for the rise of the global economy are: 1) China’s entry in the World Trade Organization in December of 2001; 2) The fall of Berlin Wall in 1989 which ushered in new phase of the industrial revolution; and 3) The strength of the U.S. Navy after WWII, providing safety and security to trade routes across the ocean(s). This, in turn, allowed for ever larger ships carrying more cargo, at a great decrease in the cost of transport of goods and materials via ocean passage. Further, the lower costs of shipping allowed for the outsourcing of manufacturing to low-cost areas of the world. This in turn masks the inflationary pressures of unrelenting increases in fiat money supply from the world’s central banking system.

After several decades of an almost infinite supply of cheap labor the “infinite” has seemingly been used up. The “Pandemic” of 2020-2021 illustrated just how fragile the global supply chain can be even with the cover of the U.S. Navy. The deficiencies that have been exposed over the past few years, in particular with the supply chain, have made it clear that the United States should be returning its focus to an expansion of its manufacturing capability, which will also require attention to a rebuild of our neglected infrastructure. This will require a lot of capital, which in turn raises the question: If we turn to expanding our country’s needs, how can we afford to send billions, if not trillions of dollars overseas with the dire level of debt we are already facing? Something must change if want to return to being a self-sustaining country.

Geopolitical Factions and Dysfunctional US Government

Try to find someone who is happy about the functioning, or lack-there-of, of our government. Have you ever tried to call the IRS in an attempt to resolve an issue? At best, consider your day on Hold. Over the last several decades the federal government has become too large, too inefficient, too overbearing, too costly, too complex and some would say too corrupt. The self-serving political class seem to get very wealthy without accomplishing anything but disagreement, division, name-calling, uncivil behavior, and politicizing just about any and every thing one can imagine. This is actually nothing new, we have seen this before throughout history. Unfortunately, currently this discord is costing us trillions of dollars as opposed to “only” millions or billions. We go through varying social economic cycles as discussed in The Fourth Turning. We also go through institutional cycles, where society becomes disconsolate with institutions and lose trust and confidence in those same institutions. Does that help describe were we seem to be? In his book The Storm Before The Calm, published 2020, George Friedman discusses many of these factors and influences in the context of the world in which we are currently living.

Marxist Infiltration of Society and Agenda of WEF

This is an area of discussion that I do not see in the financial press or the main stream media but I believe is a reality of which it is critically important to be aware. While it is widely understood that money is important, what is also important to understand is power and control. This is nothing new. History is basically a forever story of power and control. In today’s society, money, power, and control are virtually interchangeable. While taking a world history class in the 1960’s I remember discussing a quote from one of the Rothschild’s discussing money with a European monarch; “you control the money, you control everything.” As a finance major that stuck with me. As a student attempting to better understand history, I asked the question: Which comes first, Money or power? I have concluded that it depends. It would seem that Karl Marx did not have a lot of money but many that were/are wealthy came to understand that they could use his philosophies to become even wealthier, and thereby exert more control. This is not something that is foreign to so called capitalist in the United States.

In an article published in the Hillsdale College publication Imprimis, (April/May 2022) titled “Laying Siege to the Institutions,” the author Christopher Rufo discusses the Marxist designed infiltration of American culture and society. This infiltration has encompassed most every element of our society and if we expand our view, to overlay the stated objectives of the World Economic Forum (WEF), we can begin to see the picture of the desire for ultimate power and control by a small, but wealthy and influential, group of people across the globe; to the level of wanting to take over the world. I know that previous statement might sound outrageous, but consider the following partial quote from Carroll Quigley’s 1300-page book titled: Tragedy & Hope, A History of the World in Our Time, written in 1966. A partial excerpt from the Foreword of the book starts: “The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole…” Quigley was an esteemed professor of history at Georgetown University.

Ending Thoughts – not Final Thoughts as the Saga Continues

A common thread of these cycles; they have evolved over several decades. As The Fourth Turning points out: as we go through generational changes other things change also. That is just the nature of history and humankind. If we study and stive to understand these cycles we will conclude not everything is necessarily good for everyone. While globalization has resulted in a massive growth of a middle class in China, it has stagnated or reduced the middle class in the United States. Supply chains have become global but reliance upon things from thousands of miles away can create risks that have now, in the past few years, been exposed. Discontent can grow as extremes are recognized and encountered. We continue to generate more questions than answers, but unless we ask good questions, we may never recognize answers when they present themselves. Critical thinking is an absolute must in this exercise. We continue to look forward; when these cycles change our world changes with them, transformations are inevitable. Since we seem to be facing multiple cycles possibly concluding in a tight time span, we must be vigilant to change and should expect some of the results to be something we have not experienced before.

With all the dialogue that goes on amongst historians and intellectuals regarding the “isms,” once you strip away the banter, one realizes that no matter what you call it control and power are at the root. Is there really any substantial difference between socialism, communism, Nazism, fascism or even government-controlled capitalism? If the U.S. is to maintain personal freedoms as was outlined by the Founding Fathers in our Constitution the conclusion of these cycles must bring on solutions that currently disrupt civility and chaos. In the 1700’s people sacrificed everything, many their lives, to shred off the tyranny of control and power. At that time, it was a monarch across an ocean. Today’s tyranny is within our society and borders. This in turn make this enemy much harder to see or comprehend. Our constitution is based upon Natural Laws that come from a Judeo-Christian tradition, as opposed to man-made laws based on power and control. This unique form of government is the foundation upon which the United States was built, and has allowed our country to become the beacon of freedom throughout the world.

Cycles come and go and evolve because they are “cycles.” In the fullness of time cycles can evolve to be extreme, bloated, inefficient, corrupt, and even criminal. This can be especially true of cycles involving money, economics and politics. The good news is, that in the history of America these cyclicals of revolution have always created renewal. The issue now is what will the chaos brings us until we get there, and what will be required to maintain our ability to shine as a beacon of freedom for the rest of the world to see.

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