Inflation: The Fourth Turning
Neil Howe and William Strauss first coined the term “Millennial” in their 1991 book Generations and the term was created to describe those born between 1982 and 2004 who were coming of age during the turn of the new millennium. Their work went on to outline characteristics which define a generation and to show that those generational characteristics repeated in a similar way every four generations, approximately 80-100 years. When the end of the cycle comes and the 4th generation passes the mantle to their successors, it tends to be a time of crisis and great upheaval in society.
To understand where we are in that cycle, we have to understand the characteristics of the two generations which are crossing through the pivotal period of 40-60 years old where they have the most influence on society and can reshape it in their image.
Generation X (1961-1981) is at the peak of their power and influence on society. This generation is defined as a “Nomad” generation and most political and corporate leaders fit into this age bracket. The characteristics of a Nomad generation are that they tend to not trust society’s institutions, do not embrace public life and are more individualistic.
Contrast Generation X with the Millennial generation which is defined as a “Hero” generation. Hero generations come of age during a huge crisis and their lives are defined by how they resolve that crisis. Heroes are challenged by crisis which tear down institutions and then rebuild them in their image. A climate crisis is one such crisis which defines the millennial generation as they watch the world their children will inhabit be immeasurably changed in their lifetime.
Fourth turnings are the transition from Nomad Generations to Hero generations which according to the Strauss and Howe timeline, we are about 75% of the way through. We are continuing to see the conflict between the individualistic and collective good as the two generational archetypes battle for influence over society.
The Inflation Turning
Markets are increasingly worried that loose monetary policy and supply shocks are setting the stage for high and persistent inflation. However, if we put a generational lens on the current inflation environment, do we come up with a different conclusion?
Traditional economics has shown us that price inflation without wage inflation increases inequality as the owners of assets benefit while the cost of labour is kept low. This effect was magnified over the past generation with the growth of China and other emerging markets as sources of labour for western markets. The significant increase of the labour supply and resultant deflationary pressure meant that wage inflation was able to stay very low.
Viewed through a generational lens, the timing of the increase in globalisation and wealth inequality was not a coincidence. It corresponded with the rise of Generation X, defined by individualism, and the focus on building their own wealth and security.
As the world shifts from the dominance of the Nomad generation to the Hero generation, the period will be defined by the tearing down of past institutions. Whether those be the institutions of global trade, which we saw trying to emerge in the Trump presidency, or outsourcing of jobs to lower cost jurisdictions, which is now causing supply chain disruptions, it is clear that conflict is starting to take hold.
Emerging from the COVID-19 pandemic, one of the most observable outcomes is the sudden rise in wage inflation in the US and UK. Increasing wage inflation is currently being combined with higher goods inflation which means workers are “flat”, but that is still better than over the past 25 years where goods inflation did not translate into wages and workers went backwards.
What does this mean?
The hero generation is defined by their response to a crisis and the tearing down of institutions to build new ones. The millennial generation is not satisfied with the pursuit of individual wealth and the beginnings of institutions which build on the share economy are starting to emerge. The share mentality of the millennial generation could lead to the tearing down of the traditional corporate whose sole purpose is profits. The development of the concept of a social license has already started to influence the way that corporations are governed and earning lower profits to keep consumer prices low is one way to “pay” for their social license. In this context an increase in worker wages does not necessarily translate a corresponding increase in goods prices.
Another concept which is developing, initially in the online world (which incidentally is dominated by millennials) is the concept of a Decentralised Autonomous Organisation (“DAO”). These structures are governed by a community and rules enforced by a blockchain and smart contracts. Decisions are made by governance votes. These DAO’s are not designed to impart huge amounts of wealth on the founder but rather to reward those who participate in the community. DAO’s as an entity type have been legalised in the US state of Wyoming and in the last few months, the Digital Law Association and law firm Herbert Smith Freehills have suggested they be granted formal recognition in Australia. As this type of structure increases in popularity, it is a clear and rational outcome that a community would vote to keep their prices low.
All of this is leading to an interesting conclusion. The generational shift in priorities between Generation X and Millennials might mean that inflationary pressures will shift from goods prices to wages. The natural flow-on effect is a decrease in asset price inflation relative to the last 25 years and the beginnings of the wealth transfer from one generation to the next. The fourth turning is coming to an end and with it comes a changing of market and economic paradigms that we haven’t seen in almost 100 years.
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