Sometime around the year 2005, perhaps a few years before or after, America will enter the Fourth Turning…a spark will ignite a new mood…it will catalyze a Crisis. In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party” … Strauss and Howe, 1997, The Fourth Turning: An American Prophecy – What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny
Howe and Strauss published their Generations Theory during the prosperous years of 1990s in which they predicted a Fourth Turning would begin “sometime around 2005”; a period characterized by an implosion in political and economic trust, severe distress involving questions of class and race and that this period would test the very survival of the nation. They predicted that this tumultuous period would last about 20 years. If correct, we have ten more years to go and the worst is yet to come. [Podcast] [Summary]
Strauss and Howe reviewed patterns in the behavior of “generations” of Americans going back to 1584, examining changes in human attitudes and behavior and in the social mood over time. By “generation” they mean all the people born in a society over about a 20 year period. What they found is that societies have many of the same characteristics as individuals and as a result create patterns that repeat about every 80 years or roughly that of a full human life.
The pattern begins with the end of a crisis. The cornerstone of their argument is that a crisis (ex. major war, great depression) has two profound and consistent effects on a society. The first is that a crisis brings societies together as they fight to survive or against a common external enemy. The second is that the high degree of human suffering instills a high degree of risk aversion. Both of these effects lead to a drop in individualism in favor of a stronger sense of community and shared values. This shift in values also strengthens institutions; which are viewed as critical pillars of stability in the minds of those who recently endured a crisis. These profound and consistent effects on a society, following a crisis, are what start the roughly 80 year pattern. This pattern is subdivided by the authors into four turnings (4*20 = 80) as follows:
High (1946-1964): an upbeat era of strengthening institutions and weakening individualism
Awakening 1964-1984): a passionate era of spiritual upheaval, when the civic order comes under attack from a new values regime
Unraveling (1984-2007): a downcast era of strengthening individualism and weakening institutions
Crisis (2007-202X): a decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one
The Turnings are grouped into 20 year periods because this is the length of a typical generation (birth to next birth). I’ve provided specific years for the most recent Turnings, but the theory is not this exact. For example, Howe originally proposed that the Fourth Turning would begin “sometime around the year 2005, perhaps a few years before or after”. Only after the Financial Crisis did he is retrospect determine that this event was big enough to constitute “a new mood” that “will catalyze a Crisis”.
What makes each turning critical to the pattern is that each new generation grows up adapting a new set of values, and these values influence the strength of social cohesion and stability. The pattern post crisis is a drift toward individualism at the expense of society as a whole. What follows are mostly excerpts (in italics) from here:
The Silent Generation (born 1925–42) came of age just too late to be war heroes and just too early to be youthful free spirits. Their parents, by nature of living through crises, guarded them and instilled in them a strong sense of national pride, risk aversion, and respect for the institutions put in place during the crises. As the Silent Generation entered adulthood, so did the peak of community values over that of individualism. Emphasizing the collective good improved government cooperation. This is illustrated by the degree of polarization in congress which hit a low point at the end of WWII and is now at or near an all-time high.
Boomers (born 1943–60) grew up as indulged youth during the post-World War II era of community-spirited progress. Their parents, WWII still fresh in their minds, were determined to raise young people who would never follow a Hitler, Stalin, or Orwellian Big Brother. However, having not lived through a crisis they scorned institutions, civic participation, and team-playing while pushing towards inner-life, self-perfection, and personal meaning.Generation X (born 1961–81) grew up as the children of the Consciousness Revolution, an era when the welfare of children was not a top social priority. They learned young to distrust institutions, starting with the family, as the adult world was rocked by the sexual revolution, divorce epidemic, and a shift to a more explicit pop culture. Millennials (born 1982–2004) arrived in a period of declining trust and confidence in our institutions. The chart below provides one proxy for this, showing public trust in the US government at an all time low...six years into the economic expansion. To millennials, real crises are something from the History Channel. True suffering, such as that endured by the Greatest Generation (born 1901–24), is not something they are capable of comprehending.
With the Greatest Generation now living only in our memory we cannot help but remain biased toward our own uneventful experience. The technical name for this is the Availability Heuristic (or Bias); which is a mental shortcut that often leads to poor decision making. We all rely on immediate examples that come to mind when evaluating a specific topic, concept, method or decision. If something can’t be recalled, it must not be important. Subsequently, under the availability heuristic, people tend to heavily weigh their judgments toward more recent information.
This bias is one reason for recessions. During recessions we see all too well the importance of planning for the worst and saving. But when times are good the memory of tougher times slowly fades and we find ourselves dreaming of homes and cars that we can barely afford. Businesses do the same thing. In my view, the Generations theory implies that societies do this as well. The bias comes in the form of our collective memories which shape our values and therefore shape the decisions of our institutions.
Given that the Great Depression and WWII were global crises, it is therefore not surprising to see global trends reflecting slow but steady shifts in values. Global government debts fell sharply after WWII as the memory of these crises instilled a high degree of risk aversion into industrialized societies. As our collective memory of these events fade our willingness to collectively take on more debt (and with it…risk) is not surprising. Federal debt as a percent of GDP today (February 23, 2020) is now as high as it the all time high during WWII. As a country, we have never has anywhere near this much debt during a period of economic expansion without a war. The chart above depicts this for the Federal government, but households, corporations, and municipal governments essentially share the same picture between WWII and today.
Actually, what I find most compelling about the Generations theory is how complementary it is with How the Economic Machine Works, Ray Dalio of Bridgewater's theory on what drives the economy. He wrote back in 2016 that there is, “Only So Much You Can Squeeze Out Of A Debt Cycle… We Are There!”. Dalio’s point is that the multi-decade long period of credit fueled growth is over. Dalio’s theory is useful, but does not provide a very strong rationale for why long term debt cycles spiral out of control. In the end he says, “It’s because of human nature”… the Generations Theory provides a more scientific explanation of this “human nature”.
Inequality levels are another reason I find the Generations Theory compelling. Debt levels have tended to move with income inequality levels over the past century. Given the causal nature of this relationship (those with higher incomes have greater access to credit) I would expect this also occurred during previous Turnings.
There is ample evidence today that extreme income inequality can drive the people of a society to vote against the “status quo”. This necessarily leads to change; which is risky in the short term even if there is good reason to think it’s necessary in the long term. The chart below was composed by Bridgewater shortly after the last US election. While they haven't updated these findings my guess is that it has gotten even more extreme.
I also find this theory compelling because its results are driven by behavior that we know to be true about individuals. We tend to take what we have for granted until it’s gone or under threat. We tend to put off dealing with problems until they become urgent. Ultimately, the Generations Theory is saying that what is true for people is also true for societies, and that it takes a crisis for us to deal with the toughest problems we face. Until then, we will take the path of least resistance. We will just keep kicking the can down the road until the necessary degree of cooperation and shared sacrifice is no longer sufficient for our institutions to function.
There are many reasons to be skeptical of this theory. From a statistical perspective, we really only have two good data points: End of Revolutionary War in 1783 to the end of the Civil War in 1865 (82 years); End of the Civil War in 1865 to end of WWII 1945: 80 years. Howe and Strauss say they have found this pattern going back to the 16th century and in other societies, but these patterns are extraordinarily hard to qualify. People can’t help but look for patterns even when there are none to be found. The world today may be fundamentally different than the past. Our markets and relationships are spread across the globe making the cost of any serious conflict considerably more painful than at any prior point in human history. The flow of people and ideas also should have the effect of diluting generational attitudes.
The Chinese have a saying: huò xī fú suǒ yǐ fú xī huò suǒ (said: who-ah she foo sue-oh E foo she who-ah sue-oh foo)
祸兮福所倚，福兮祸所伏
This literally means: misfortune leads to fortune and fortune leads to misfortune. This saying has its roots in Taoism an eastern philosophy that the Chinese have reflected upon for thousands of years to cope with misfortune. What this saying means to me is that crisis is the cure. That struggle is what makes us strong. That strife is inevitable, but also necessary for growth and prosperity.
Let’s hope Howe and Strauss are wrong.
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Feel free to share your own thoughts on the Fourth Turning. There is no better compliment you can give us than your thoughtful criticism.
Sincerely,
Joseph
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Disclaimer: These are our personal views. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Our hope is that these observations will merely help you to more critically examine your own beliefs about finance and stimulate dialogue.