No Quick Fixes for South Korea’s Economic Woes

The country’s export-driven economy is straining to adapt.


Summary

South Korea’s economy, which relies on exporting high-value-added manufactured goods, has experienced slowed growth as a result of the ongoing global exporters’ crisis. This report examines the current status of the South Korean economy. It identifies both external threats and internal challenges, and it also discusses the government’s attempts to address them.

  • Slowing economic growth and consistently declining exports have put strain on South Korea’s economy, and this strain has manifested as political pressure to act. The South Korean government has attempted to make long-term changes to reorient the country’s economy, and it has also introduced short-term efforts to prevent industry collapse.
 
  • The largest external threats to the South Korean economy are twofold: over-reliance on exports (particularly to China) and decreased global demand for some of its largest export industries, including refined petroleum and shipbuilding.
 
  • Internal threats include strict labor laws, economic dependence on massive conglomerations like Samsung and Hyundai, rising household and national debt and increasingly precarious financial institutions.
 
  • The South Korean government’s efforts to reorient the economy may be effective in the long term, but for now, the country remains heavily dependent on exports and will continue to be negatively impacted by the global exporters’ crisis for the foreseeable future.
 

Introduction
 

Multinational South Korean conglomerate Samsung recently made global headlines after announcing that it would recall and permanently end production of its popular Galaxy Note 7 phone due to a defect that caused the device to ignite and explode. The scandal is projected to have a serious impact on Samsung’s coffers. Losses and forgone sales could reach $17 billion, the impact of which is even more significant when considering that Samsung makes up roughly 20 percent of the entire South Korean economy.





A customer inquires about returning a Samsung Note 7 mobile phone at a Samsung store in a mall beneath the company's headquarters in the Gangnam district of Seoul on Oct. 12, 2016. Samsung Electronics slashed its third-quarter profit estimate by 33.3 percent, citing fallout from the recall nightmare surrounding its scrapped Galaxy Note 7 smartphone. ED JONES/AFP/Getty Images

Recent labor union protests have further signaled trouble for the South Korean economy. Workers at Hyundai Motor Company conducted a nationwide, full-day walkout in September, demanding wage increases. Though Hyundai workers have a fairly consistent track record of yearly protests, this was the largest strike in the company’s history and cost Hyundai an estimated $2.5 billion in lost revenue. The company’s operating profits fell an estimated 2.5 percent as a direct result of the strikes, and its quarterly net profits fell for the 10th consecutive time. Similar strikes by the Korean Public Service and Transport Workers’ Union have recently occurred. Furthermore, tens of thousands of protesters in Seoul rallied late last year against proposed changes to the country’s labor laws that would relax rigid standards for hiring and firing employees.

Samsung’s phone fiasco and the recent spate of labor union protests have called renewed attention to the overall status of the South Korean economy, the world’s 11th largest economy. Therefore, we thought it prudent to conduct our own re-evaluation of the South Korean economy in light of the aforementioned events and the global economic crisis that is underway.

Last year, we identified South Korea as
one of the top 10 victims of the global exporters’ crisis. Though the country’s annual GDP growth has remained positive, it has slowed in recent years; additionally, its exports have – with the exception of this August – fallen for 21 consecutive months. The South Korean economy has indeed been walloped by a variety of factors, both external and internal; the most impactful of these factors has been decreased demand from China, its largest customer.

With exports and, subsequently, economic growth continuing to decline, the South Korean government has attempted to prevent the country from entering a period of economic stagnation similar to Japan’s Lost Decade by making a number of changes. The majority of these changes focus on long-term economic reorientation and will require innovation and political maneuvering that is both time-consuming and challenging. Some of the proposed changes, however, are short-term Band-Aid solutions intended to keep sectors of the economy afloat.

Though the government may succeed in reorienting the South Korean economy towards new export markets and establishing a larger service economy, the current reality is that South Korea remains reliant on exports, particularly to China. Therefore, it is likely that South Korea’s economic slump will continue into the foreseeable future.


The South Korean Economy’s Current Standing
Exports, many of which are high-value-added products, make up close to half of South Korea’s economy. This high percentage of exports is anomalous among the countries of the Organisation for Economic Co-operation and Development (OECD), of which South Korea is a part.

South Korea consistently releases its monthly export numbers on the first business day of every month, thus providing reliable data by which to gauge the country’s economic performance. These monthly reports indicate that South Korea’s exports have been on the decline over the past 21 months, with August’s 2.6 percent rise (likely due to a temporary rebound in ship exports) as the only exception. Despite that brief bump, exports to China – which account for nearly a quarter of South Korea’s total exports – fell for the 15th straight month, down 9 percent year-over-year after a similar fall in exports to China last month.

South Korea's GDP Growth

The rate of South Korea’s economic growth, measured in GDP, is also falling. In 2014, the economy grew by 3.3 percent, and 2015 saw growth of 2.6 percent. However, despite weakening exports and Samsung’s recent catastrophe, the Bank of Korea expects the economy to reach its target rate of 2.8 percent growth by the end of 2016 (though this target was revised from its original 3.1 percent growth forecast). Both the International Monetary Fund and OECD have projected growth of 3 percent for the South Korean economy in 2017. However, forecasts from private research centers and think tanks are less optimistic, estimating growth in the range of 2.2-2.6 percent. These estimates are tied to slowing global growth. The World Trade Organization has slashed its global trade growth forecast for 2016 down to 1.7 percent and estimates a range of 1.8-3.1 percent for 2017, much of which is linked to decreased import growth in North America. Decreased global demand harms any exporting economy, but it presents a particular challenge to South Korea as its two largest customers, China and the United States, have both slowed their import consumption.

The reasons for South Korea’s decline in economic growth can be divided into two categories: external problems and internal challenges.

External Problems Facing the South Korean Economy


South Korea's Top 10 Trading Partners

South Korea’s largest external threat is its massive exposure to China, its largest trading partner, which accounts for approximately a quarter of its exports. Like the South Korean economy, the Chinese economy has also been weakened by reduced demand for its exports; this is a result of both structural slowdown and the 2008 global financial crisis. Its weakened economy has therefore reduced China’s consumption, which is one of the key elements that triggered the current exporters’ crisis affecting South Korea and other export-driven economies. The decreased Chinese demand for South Korean electronics, vehicles and machinery has caused a serious blow to the country’s economy.

South Korea has taken steps to reduce its future dependence on China by seeking alternative markets for its exports, particularly in the developing world. Here, South Korea is playing a long game. It has established a presence through participation in international organizations, aid-giving and diplomacy while simultaneously exporting its pop culture in the form of music and television to create a stable consumer market in the future. However, positive economic effects from this new consumer base will not be felt for some time yet; therefore, dependence on China will remain problematic for the foreseeable future.

In addition, the value of South Korea’s exports is declining at a steeper rate than the volume of its exports. This is largely due to currency devaluation in South Korea’s largest trading partners; the South Korean currency, the won, has strengthened while the Chinese yuan and Japanese yen have lost value. This makes Korean exports more expensive (especially to its largest importer, China) and puts already strained domestic producers at a disadvantage. Currency devaluation among its competitors makes South Korea’s exports less attractive to importers because they have become comparatively expensive. In particular, high-end Japanese products in the technology and manufacturing fields have become more appealing to importers as the cost of Korean products has increased. The South Korean government has introduced efforts to cut prices in an attempt to make exports more competitive, but this has decreased profitability and has not done much to spur export growth.

Furthermore, the global economic slowdown has impacted several of South Korea’s largest export industries. In particular, it has negatively affected South Korea’s refined petroleum and petrochemical industry, the country’s second largest export industry. Declining oil prices, which have been falling since June 2014, have slashed the value of South Korea’s petrochemical and refined petroleum exports. In 2013, South Korea reported $52.78 billion in refined oil exports, but the total value fell to $46.9 billion in 2014. By 2015, South Korea’s refined oil exports were only worth $30.7 billion.

The country’s fourth largest export industry, shipping and shipbuilding, is also hurting as decreases in global trade weaken the demand for shipping and low oil prices reduce demand for oil tankers. The three largest shipbuilders in the country – Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries – reported nearly $5 billion in combined losses in 2015 and have undergone massive layoffs to cut costs. Furthermore, major companies like Hanjin Shipping are at the brink of collapse. In an effort to reduce future damage and potential unrest, the government has stepped in, and on Oct. 31 announced a stimulus to the shipbuilding sector. The stimulus will include a government order for more than 250 ships by 2020, worth approximately 11 trillion won ($9.6 billion), 6.5 trillion won in fresh financing, 1.5 trillion won injected into the local economies of coastal cities that rely on the shipping industry, and plans for upping the profitability and global competitiveness of South Korean shipping companies and shipyards.

Another external threat to South Korea’s economy is the U.S. Federal Reserve’s interest hike in December 2015, the first such hike in nearly a decade; there is also a strong possibility of another hike in 2016. According to research published by the Korea Institute for International Economic Policy on Oct. 18, U.S. rate hikes will likely cause an exodus of foreign investment valued at approximately 3 trillion won over the next three months. As investors shift their money from South Korea to the U.S. to increase their returns, the South Korean economy will be negatively affected.

However, an additional rate hike would mean that the value of the dollar will strengthen against the won, giving South Korea the chance to increase its exports to the United States as its imports become comparatively cheaper — another step towards diversification away from China. Even so, U.S. imports are on the decline overall, and imports from South Korea are no exception. Despite rising consistently over the past decade, U.S. imports from South Korea for the first eight months of 2016 fell nearly 2 percent year-over-year, equivalent to $850.2 million. Thus, exports to the United States are not likely to dramatically jump as a result of a stronger dollar.

In addition to its attempts to mitigate the negative effects of the global exporters’ crisis, the South Korean government has actively encouraged growth of the country’s service economy since 2014. It is here, in the development of the service economy, that South Korea has the most opportunity for future growth. According to a report published by the Korea International Trade Association, South Korea’s service industry accounts for approximately 59 percent of the country’s total GDP – the smallest portion among major members of the OECD, where the average is 73 percent. South Korea’s service industry is dominated by small- and medium-sized enterprises (SMEs) and is inefficient compared to that of other OECD members, with productivity rates half those of the United States. Though South Korea has a considerable research and development budget, only roughly 3 percent is spent on the service industry. The major barriers to this transition are regulatory – the barriers to entry remain high and tight financial regulations make investment difficult. The government has announced plans to roll back regulations, increase funding for startups and cut the tax burden for service industries, but these changes have so far failed to yield significant results due to cultural barriers, political disagreement and the slow nature of change.


Internal Challenges Facing the South Korean Economy

 

Top 11 Economies by GDP, 2015

 
South Korea’s emphasis on manufacturing saw the country rise from poverty to the world’s 11th largest economy in the span of two generations. However, this created an over-reliance on manufacturing. In addition to being an external challenge, the reliance on manufacturing has led to serious internal structural challenges for South Korea.

The country’s major export industries are those that lend themselves to cost efficiency and consolidation, which has given rise to a group of large conglomerations, or “chaebols.” The top 10 chaebols – including Samsung, Hyundai and Lotte – make up an estimated 75-80 percent of South Korea’s economy. Downward pressure on wages has led to a recent string of protests, including a series of strikes at Hyundai that have put serious economic strains on the company and, subsequently, the entire South Korean economy. The chaebol-centric manufacturing industry has also stifled the growth of SMEs, which further promotes the country’s over-reliance on these conglomerations. Though the chaebols have certainly contributed a net positive to South Korea’s economy, their prominence and success have encouraged the development of an economic environment that is heavily dependent on manufacturing, and this further discourages the development of a service industry.

Here, the government is in a precarious position. The chaebols hold political sway, and South Korea must walk the line between the conglomerates and the public. To get money out of the chaebols’ coffers and back into the economy, the government has introduced a 10 percent tax penalty on excessive holdings. It has also promoted tax breaks for companies that use reserves to increase wages, investments and dividends. Additionally, to encourage the growth of the service industry and a healthier number of SMEs, the government has also moved to introduce legislation that will make it easier to promote good workers and fire poorly performing employees.

South Korea’s current workplace culture awards promotions and job security based on age and tenure rather than performance. The difficulty of firing poorly performing employees places a strain on productivity and efficiency, and it falsely inflates the country’s 4 percent unemployment rate. This low number masks the high percentage of part-time and contract workers in the South Korean economy (the result of companies being afraid to hire new employees). To achieve global-norm flexibility in hiring practices, the South Korean government has made moves to implement legislation that shifts workplace culture to reward performance over seniority, which was another cause for the protests at Hyundai and other corporations. South Korean trade unions are powerful and are often seen as militant. Continuing this path of legislative changes will likely provoke further public discontent, possibly even violence, which has made these changes a source of debate and disagreement within the government. Passing such legislation, however, would be a step towards greater efficiency and would help promote the growth of more SMEs.

For the last several years, South Korea has also been challenged by rapidly expanding levels of household debt, which threatens the economy by putting a damper on already slowing domestic consumption. In 2014, the government cut interest rates three times in an effort to boost domestic demand. Even so, South Korea’s total household debt rose to a record high of 1,060 trillion won in 2015. The ratio of debt to disposable income was approximately 160 percent. This is higher than the OECD average and, as many have pointed out, is similar to U.S. figures at the start of the subprime mortgage crisis.

The South Korean financial sector has grown in size, but it has also contributed less to the country’s GDP since the global financial crisis due to shrinking internal financial activities. According to a recent report published by the National Assembly Research Service, the financial industry accounted for only 4 percent of South Korea’s GDP in 2014 – a 1.2 percent drop from 2007. In April, Moody’s Investors Service reported that it would change its outlook on South Korea’s banking system from stable to negative, citing deteriorating creditworthiness over the next year and a half.  Precarious financial institutions become even more of a concern when considering the rapidly expanding levels of debt – if default rates begin to rise and the banks are not able to absorb the shock, South Korea could face a banking crisis, which would surely have a negative impact on its economy.
    
Conclusión

South Korea’s economy faces a host of internal and external threats. Though the largest of these are tied to the global exporters’ crisis, the current economic slump has also revealed a host of internal economic problems. These have manifested in political issues as the government works to make long-term readjustments while also providing short-term solutions to stimulate the economy. These efforts to address both long- and short-term problems have varied in success, but may indeed succeed in moving the South Korean economy away from its dependence on China and its over-reliance on the manufacturing economy.

In the past, South Korea has demonstrated economic resiliency and adaptability. This can, in part, be attributed to a political culture of discipline and swift action, which has historically been supported by its population. However, a successful transition remains a long way off. The shift to a service economy cannot happen overnight, and the South Korean government is already facing domestic pushback and political roadblocks to making the changes necessary for such a transition.

South Korea’s current economic reality is that of a manufacturing economy dependent on exports, which have been reduced by the exporters’ crisis and weak global demand. These problems have been compounded by internal structural issues, growing national and household debt and increasingly precarious financial institutions. As a result, it is likely that South Korea will continue to feel the squeeze of the global exporters’ crisis.


America’s foreign debts

Net debt, big returns

The exorbitant privilege looks greater than ever
. 


AS DONALD TRUMP sees it, America’s trade deficit is a sign of economic weakness, proof that lousy trade deals have sent production overseas. But Uncle Sam does not just import goods from the rest of the world and send nothing in return (though that would be a lucrative arrangement). Rather, the net inflow of goods is matched by a net outflow of stocks, bonds and other financial assets.

That makes America a debtor. In theory the interest and dividends paid to foreigners should chip away at national wealth in future. Since 1989 foreigners have owned more assets in America than Americans have owned overseas; in the jargon, the net international investment position (NIIP) has been negative. But America is an unusual borrower. For almost all of that time, it has received more income on its overseas investments than it has paid out to foreigners. This is strange: it is akin to someone’s savings earning more than enough interest to service his far bigger debts.

This contrast is getting starker (see chart). In recent years the NIIP has tumbled to -44% of GDP, the lowest since 1976, when the data begin. Yet net primary income—the returns—has held steady at about 1% of GDP. In dollar terms, America’s NIIP deficit is almost seven times as big as any other country’s. As a percentage of GDP, 11 rich countries have worse NIIPs; only one—Greece—earns net positive returns (probably thanks to its bail-outs).

The disparity between America’s balance-sheet and its earnings is sometimes attributed to the “exorbitant privilege” of printing the dollar, the world’s reserve currency. Everyone wants dollars, it is said, so America can raise funds more cheaply than others. Two other factors help. First, foreigners like to buy low-yielding American debt, but Americans investing overseas are keener on higher-yielding equities. Second, America seems to earn more on some of its investments of a given type.

A paper last year by Stephanie Curcuru and Charles Thomas of the Federal Reserve argues that the second effect is by far the most important. Between 1990 and 2010 the average yield America received on its foreign direct investments (FDI) was about 6.2 percentage points higher that what it paid out on comparable liabilities. The authors attribute this mainly to the greater risk of investing overseas and to America’s high corporate taxes, rather than to any mysterious benefit attached to issuing the world’s reserve currency.

But that does not help to explain the recent widening of the gap between the NIIP and net returns.

The current-account deficit, which includes the trade deficit, is only partly to blame for the worsening balance-sheet. At 2.6% of GDP in 2015, it was less than half what it was in 2006. The NIIP is being pushed higher because of the strong dollar (which reduces the dollar value of American overseas investments) and the rapid rise in American share prices, says the IMF; it forecasts that the NIIP will reach -63% of GDP by 2021. So, because the economy has performed strongly, foreign investors in America have booked bigger paper gains than Americans invested overseas, despite generating less income. Sometimes privilege isn’t all its cracked up to be.

The Burning Platform 


CIVIL WAR II – FOURTH TURNING INTENSIFYING (PART I)

“History offers even more sobering warnings: Armed confrontation usually occurs around the climax of Crisis. If there is confrontation, it is likely to lead to war. This could be any kind of war – class war, sectional war, war against global anarchists or terrorists, or superpower war.
 
If there is war, it is likely to culminate in total war, fought until the losing side has been rendered nil – its will broken, territory taken, and leaders captured.” The Fourth Turning – Strauss & Howe -1997


As we enter the final stretch of this vitriolic, deplorable, venomous, propaganda saturated, deceitful, rigged presidential election spectacle, it becomes painfully obvious this Fourth Turning is careening toward bloodshed, bedlam, confrontation, and civil war. The linear fixated establishment, who fancy themselves intellectually superior to the irredemables, are too blinded by their sociopathic, increasingly audacious subversion of the Constitution, to grasp the level of rage and disillusionment of a white working class that has been screwed over for decades.

As the Wall Street shysters frantically accelerate their embezzlement of what remains of middle class wealth, with the Fed and the corporate media propagandists as their wing-men, the country devolves into a corporate fascist state. The disposition of the nation grows dark like the sky before an approaching deadly blizzard. As passions boil over and violence portends, this Fourth Turning hastens towards a bloody decade ahead with an uncertain climax.
If you think this is just hyperbole, you either haven’t studied history or your cognitive dissonance and normalcy bias prevent you from seeing the unavoidable societal altering clashes, which occur like clockwork on an eighty year cycle, when the portents are right in front of your eyes. Historian Arnold Toynbee’s great war cycle that arise every 80 years or so, aligns perfectly with the Fourth Turning generational theory. Great wars occur when the generation that doesn’t remember the last catastrophic war ascends to leadership of the country.

We are eight years into a Crisis period which won’t end until the mid-2020s. As this bitterly vicious presidential campaign accelerates towards a finale which will leave the country divided and irate, the hostile opposing forces will be seeking revenge, retribution, and retaliation no matter the outcome.

There is no doubt the regeneracy is well under way.

“The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation and empire. The very survival of the nation will feel at stake. Sometime before the year 2025, America will pass through a great gate in history, commensurate with the American Revolution, Civil War, and twin emergencies of the Great Depression and World War II.” – Strauss & Howe The Fourth Turning 
 
It was five years ago I spent a couple fascinating hours with Neil Howe, co-author of the Fourth Turning, during the Occupy Wall Street protests. He thought the protests were all passion and no depth, engineered by anarchist Boomers. He was right. I thought OWS might be the start of the regeneracy, but it flamed out quickly. It was only a foreshadowing of what was to come. Whatever event or movement created the regeneracy, it would be driven by the toxic combination of debt, civic decay, and global disorder.

Neil was particularly worried about the Federal Reserve zero interest rate policy and how it was ruining our economic system, creating disincentives to saving and encouraging warped, debt driven speculation. And that was in 2011. The Fed keeping interest rates near zero on behalf of a corrupt establishment for the last eight years has been the primary factor in creating the anger, disillusionment and revolutionary spirit driving the regeneracy.

No critical thinking human being can deny this tumultuous presidential election and its equally turbulent primaries have been fueled by the dreadful self-serving response of the establishment to the 2008 Wall Street created financial collapse; the geopolitical anarchy created by U.S. interventionism in the Middle East; the civic decay created by a failing government educational system; rampant debt financed materialism enabled and encouraged by the financial/media complex; and racial division facilitated by the president and his social justice warrior brethren.

The rescue of Wall Street and destruction of Main Street by the Fed, Wall Street and the captured politicians of both parties in Washington D.C. has created the angry, acrimonious, throw the bums out mood boiling over in flyover America. The widening Grand Canyon gap in wealth between the haves and the have nots, produced by solutions from sociopaths in suits has reached the pitchfork and torch level.

The linear thinking ruling class has been in denial since this Crisis catalyzed in September 2008.

Their looting, pillaging and ransacking campaign, designed to enrich and empower a small cadre of shadowy, powerful, wealthy men, had been successful for decades. When you control the currency and interest rates; rig the financial markets; buy the politicians; write the laws and regulations; own the corporate propaganda machines known as the mainstream media; operate a high tech surveillance state; create a dumbed down populace through government school indoctrination; and distract the masses with iGadgets, reality TV, hero worship, professional sports, social media, irrelevant cultural issues, and literally thousands of other modern day bread and circuses; you become arrogant and careless.

These sociopaths are so consumed with their ravenous fleecing of the middle class, waging wars for profit, and shredding the Constitution, they failed to recognize 2008 for the seismic earth shattering event that will change everything. The mood of the country shifted like tectonic plates beneath the nation. The mood continues to grow dimmer, as the peasants grow poorer and the modern day aristocracy (Wall Street bankers, corporate executives, corrupt politicians, shadowy billionaires) accumulate obscene ill-gotten wealth through their complete capture of the system. This perverted, degenerative, criminal degradation of our society is powerfully summed up by Jesse from Jesse’s Café Americain:

“Not all sociopaths wield knives and knotted cords. Some wear suits, and are exceptionally intelligent and articulate, obsessively driven, and are able to use and undermine the law and the rules for their advantage, like weapons.  It is never about the win, never about the money.  It is about the kill, the expression of their hatred, about elevating themselves with the suffering of others. Bind, torture, kill.  Not only with ropes and knives, but also with power and money, and the subversion of law.  Lawlessness is their addiction, their will to power.
 
When societies become lax and complacent, these sociopaths can possess great political power through great amounts of unprincipled money.  And over time they become almost anti-human, destroyers of all that is good, all that is life, all that offends their insatiable sickness with its goodness.  They twist the public against itself, and turn a broad sweep of society into their killing grounds. This is the undeniable lesson of the last century.  There are monsters, and they walk among us.”
 
Neil Howe has noted in previous articles the catalyst, climax and resolution of Fourth Turnings can be specifically dated. But the regeneracy is more of an era than a date. With only three previous American Fourth Turnings, I imagined the regeneracy to be a specific event where the American people, faced with growing peril and danger, put aside their differences and rallied around a strong leader to build something new. Boy was I wrong.

In retrospect, the American people were numbed by the Great Depression and the bloody initial battles of the Civil War. They just let FDR and Lincoln do whatever they needed to do. The regeneracy marks a growth in centralized authority and resolute governance at a time of great risk and urgency. I believe this era of regeneracy began at the outset of the presidential primaries early in 2016.

Based upon the reaction of the citizens in the last ten months, the dire problem facing the nation, perceived as the largest threat to our future, happens to be the Deep State establishment currently ruling the country. The captured mainstream media and grey beards running both political parties were completely stunned, horrified, and irate at the unprecedented success achieved by the two anti-establishment candidates, Trump and Sanders.

This election was supposed to follow the script as planned and coordinated by the establishment, with Hillary Clinton defeating Jeb Bush and continuing the corrupt status quo policies agreed to by the bought off leaders of both parties. They badly miscalculated the mood of the country and the whirlwind of change seeking to sweep away the stubborn remnants of a crooked, decrepit, putrid, existing social order. This collective middle finger to the establishment could only happen during a Fourth Turning.

This regeneracy is well under way and is poised to transform and replace the very foundation of this crumbling empire of debt, delusions, and denial. The unanswered question is what happens next. I posed that question to Neil Howe five years ago and he said the specific events of a Fourth Turning are unknowable, but the reaction to those events by the generational cohorts is consistent over time.

We are seeing the reaction of critical thinking Americans as they come to the realization the system is rigged against them. A revolutionary spirit is once again rising among the deplorables. I also asked Neil about the theory Fourth Turnings alternate between external conflicts and internal conflicts. He found the subject fascinating, but didn’t think there were enough data points to make a determination.

Based on the current path of this Fourth Turning, I’m now convinced of this alternating sequence between advancement cycles and atonement cycles. The advancement cycles can be seen as establishing, whereas atonement cycles are disestablishing. It is apparent each Fourth Turning alternates between an external struggle and an internal struggle. The American Revolution was a struggle against an external oppressor – Great Britain.

The Civil War was an internal struggle between the industrial North and the agrarian South. The Depression/World War II struggle was mainly against an external threat – Germany, Japan, and Italy. The American Revolution established our country. There was optimism and elation as a new republic, forged under an enlightened Constitution and led by judicious intelligent men, was born. It was clearly an advancement cycle.

The Civil War disestablished states’ rights, slavery, agrarian society and Constitutional rights. It was an atonement cycle for our actual and implicit sins. There was no glorious high. The resolution felt more like defeat, with the country exhausted, bitter and angry. The country had exhausted itself, spilling the blood of over one million men. The new High after an atonement cycle is like a cold miserable rainy dark Spring.

The Great Depression/World War II Fourth Turning established a new world order led by the United States. As the only major country left unscathed by the ravages of global war, the U.S. became the producer for the world, whose dollar was unquestioned as the currency of global trade. The new High was unleashed with fanfare and adulation. It was like a delightfully warm Spring, with flowers blooming and children frolicking.

All signs point toward this Fourth Turning being a life or death struggle between the ruling class of sociopathic bankers, corporate elites, and sleazy politicians versus the oppressed and infuriated middle class. The lying, deceit, rigging, deception, theft and other crimes perpetrated by the ruling elites will be atoned for. The heroic patriotic revelations from Edward Snowden, Julian Assange, and Bradley (Chelsea) Manning proving the government and politicians to be lying, corrupt, immoral, sociopathic traitors to the Constitution have undermined the last vestiges of trust in the system and the establishment. The alignment of generational dynamics will provoke the responses to events moving forward. We have been badly led. A silent coup by Deep State perpetrators has led to the complete capture of our economic, financial, judicial and political systems.

A vast swath of the populace has been lured into living beyond their means. The existing system is unsustainable. The Boomer generation does not want to yield on their perceived entitlements. The Millennial generation is saddled with un-payable debts, living in their parents’ basements, working the night shift at Ruby Tuesday. Generation X is trapped in the middle of this generational struggle.

The huge economic imbalances, created by politicians buying votes and engineering wealth inequality to benefit the few, have built up over decades like flood waters behind a weakening levee.

When the levee breaks the morally bankrupt criminal social order will be swept away in the raging torrent to follow.

Winter will eventually turn into Spring, but it might be a bitter, gloomy, austere Spring. Every Fourth Turning brings on forecasts of imminent doom, but that is also a trait of Prophet (Trump, Clinton) Generations. It’s how they feel about the prospects of their imminent die off; they expect the entire world to go with them. The 2008 financial crisis was horrific, scary and an eye opener for those who blindly believed what they were told by their establishment zoo keepers. The regeneracy has begun; trust in the system has further disintegrated; this presidential election has further deepened this distrust of the entrenched establishment; and the coming bust for stocks, bonds, and real estate will knock out the supports for the dwindling remaining trust in this crooked system.

“This might result in a Great Devaluation, a severe drop in the market price of most financial and real assets. This devaluation could be a short but horrific panic, a free-falling price in a market with no buyers. Or it could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on.”
 
Eventually, all of America’s lesser problems will combine into one giant problem. The very survival of the society will feel at stake, as leaders lead and people follow. The emergent society may be something better, a nation that sustains its Framers’ visions with a robust new pride. Or it may be something unspeakably worse. The Fourth Turning will be a time of glory or ruin.” Strauss & Howe The Fourth Turning
 

The next ten or so years will be atonement for decades of bad choices, corrupt leadership, living beyond our means, waging wars of choice across the globe, believing blatant falsehoods, exhibiting willful ignorance, ignoring facts, and failing to uphold the Constitution. Don’t think you can escape the consequences of this Fourth Turning. It doesn’t matter whether you lived according to a moral code, avoided debt, worked hard, paid taxes, and generally lived an upstanding honorable life.

The death and destruction headed our way will engulf the innocent as well as the guilty. I’m reminded of the penultimate scene in Clint Eastwood’s dark, brooding, vengeful western Unforgiven when Little Bill Daggett laments to “killer of women and children” William Munny that he doesn’t deserve to die this way. Munny responds, “deserves got nothin’ to do with it.”

Then he pulls the trigger. This is the kind of future we will be dealing with, whether we like it or not.




In Part Two of this article I will use recent polling data to assess where the most likely sparks will arise to start the civil war conflagration which will accelerate the crumbling of the American Empire.

To reinforce the obvious, Fourth Turnings NEVER de-intensify. They end after the spilling of much blood, incomprehensible destruction and the total defeat of the vanquished.
 


Can Governments Take Baton From Central Banks?

Central banks have long been calling for politicians to take action. The issue is becoming urgent.

By Richard Barley

2016 Rio Olympics. Relay races are all about the passing of the baton. The recovery from the global financial crisis is more a marathon than a sprint. Photo: Reuters


Monetary policy in Europe hasn’t quite gone from “whatever it takes” to “that’s all, folks.” But the days of central banks acting alone cannot last forever. Investors used to hanging on central bankers’ every word need to listen just as closely to governments to see whether calls for support are answered.

The expectation after the Brexit vote in June was for yet more central bank stimulus to be pumped into markets globally. In the end, only the Bank of England acted. And even it has now signaled a rethink, warning Thursday that policy could react to further developments by loosening or tightening policy from here. Fiscal policy is in focus.

And the debate in the eurozone is clearly on the move. At the hawkish end, Bundesbank chief Jens Weidmann warned Thursday about the dangers of keeping interest rates low for too long, including damage to the financial system, increased risk-taking and reducing the incentive for governments to fix their problems.

But European Central Bank President Mario Draghi and executive board members Peter Praet and Benoît Coeuré also gave speeches at the end of October that hit on the same challenges to monetary policy. Two issues, one economic and one rooted in the financial system and markets, are at play.

The first is that monetary policy can stabilize and smooth economic outcomes, not promote outright improvement. Potential growth for the eurozone is pegged at just 1%; core inflation is running around the same level. Persistently weak nominal growth may be shaping expectations about the future, meaning investment stays weak and unemployment stays higher than it otherwise might be. Monetary policy can do little about this.

The second is the risk of current monetary-policy settings becoming counterproductive for the financial system. Mr. Draghi highlights, for instance, that declining interest rates, which pose challenges to banks, have been accompanied by the benefit of higher asset prices. But once these capital gains have been taken—or indeed go into reverse—there is no offsetting force.

This is leading to a growing urgency in the calls for politicians to carry out labor-market and other reforms that might boost growth and find smart ways to use fiscal spending more effectively. Mr. Coeure says postponing reform “is not a valid option anymore.” Monetary policy can stay loose, but needs support from elsewhere.

Relay races are all about the passing of the baton. The recovery from the global financial crisis is more a marathon than a sprint, but markets should keep a close eye on whether politicians fumble the challenge.


Democracy’s Majesty and 2016’s Indignity

After Tuesday, life will go on, and things are so bad they almost have to get better.

By Peggy Noonan


Thinking about Election Day I realized how much I miss the majesty of the old voting procedures.

You used to go into a tall booth and stand alone and no one could see you vote. The booth was enclosed by dark curtains. You entered and pulled a big metal lever and it closed the curtain behind you. You faced long rows of candidate names with a metal toggle switch next to each. You could put your finger on the toggle and hesitate, or you could smack it down like it was a nail and you were a hammer. There was a satisfying little click. I used to take my little boy and explain what we were doing and why it was important. When you were all done you’d pull the big metal lever again, and that would lock in your vote (you hoped—America has always been full of mischief) and the curtain would open with a whoosh and you’d emerge, a citizen who’d done a citizen’s noble work. Pretty much everyone voted on Election Day itself so it was a communal experience. You saw your neighbors.

Now it is some of the neighbors and little majesty, cheap desks in a busy room with anyone walking by and you standing there like a mook, marking a paper. No click, no whoosh, and the desks have sides but it doesn’t feel so much like a secret ballot now, and it doesn’t have the old dignity.

I can hear you saying, “What does?”

***

Someone is going to win Tuesday and then, if trendlines that have proved reliable in the past continue, the sun will come up on Wednesday. (We claim this with a 3% margin of error.) We’ll go forward. We’re in a hard time and we’ll get through it. The country isn’t just split but unhappy with its choices and pessimistic as to its political future. Twenty sixteen was both the result of and a reckoning with what hasn’t worked the past 15 years. We’ll have to spend the next few years trying to get things in order and figure out how to create a better political reality.

A memory that stays with me is a college student down South who in September asked me if the young, experiencing national politics for the first time this year, should feel despair. No, I said, you should be inspired. You’re not even out of school yet and you can do better than this. All of you will have to set yourselves to saving us. It got a laugh but I meant it, and the audience knew.

How did we get here? How did we get two candidates so widely disliked and disrespected? In broad strokes:

Donald Trump didn’t break one of our two great and ancestral political parties. He won the nomination because the Republican Party was already broken, and those responsible for the party, the elected officials and thinkers, didn’t know. Now they do. Soon they will begin that stage of political mourning known as the symposia process. They’ll discuss how to repair, renew, keep the party together. Or the party will, over the next few cycles, split apart.

Donald Trump doesn’t happen in a more or less united party, he happens in a broken one. As he rose there were essays saying what was happening with the Republicans was the result of a too-great reliance on the thinking and ways of the party’s old, victorious past. There is some truth to that. You can’t be the Democratic Party of 1980 operating from the playbook of 1940. Republicans of 2016 can’t live off the modes and approaches of 1980.

But the split in the party happened in the past 15 years. When you give a party two unwon wars, one a true foreign-policy catastrophe, and a great recession, it will begin to break because its members lose confidence in its leaders. When the top of the party believes in things that the bottom of the party doesn’t want (on immigration, entitlements and trade), things will break further. The bottom will begin to feel the top no longer cares about it. That will end their loyalty. Mr. Trump’s Republican foes are wrong in thinking his followers are just sticking with the party. They’re not, they’ve broken from the party.

In such circumstances the base of a party will do surprising things, such as turn, in hopeful desperation, to a strange outsider in hopes maybe he can break through the mess.

Hillary Clinton’s candidacy results from webs and arrangements—the big name, the big money, the old relationships, the air of inevitability. She is the nominee because the Democratic Party, which used to fight about great issues of war and peace, of the deeper meaning of foreign and domestic policy—it was a vital thing—is now kept together by one central organizing principle: the brute acquisition of power, and holding on to that power no matter what. The worst members of the party appear to care almost nothing about what that power is used for, how it will be wielded to achieve higher purposes. They’re just making a living. They’re just on a team. It is Madison’s fear of the destructive effects of “faction” taken to the nth degree. You see this in the hacked emails of John Podesta. The spirit of the emails I’ve seen is of back-scratching, networking, favor pleading.

The Democratic Party and its lobbyist/think-tank/journalistic establishment in Washington have long looked to me to be dominated by people devoted mostly to getting themselves in the best professional position and their kids into Sidwell Friends School. They want to be part of the web, the arrangement. They want to have connections, associates, a tong. They want to be wired in. They don’t want to be I.F. Stone, alone, reading the fine print of obscure government documents. And Clintonism—for years the biggest web, the securest source of money, a real tong with enforcers and reward-dispensers—has long been a sound route to all of this. You may have to bend rules to be part of it, accept unsavory deals and characters, but it is warm and cozy in there.

One thing I saw this year was that sincere conservatives wholly opposed to socialism had real respect for Bernie Sanders because they saw his sincerity. He wasn’t part of the web and they honored him for it.

Both parties have their webs. Maybe this year begins the process by which they will be burned away.

A closing thought: God is in charge of history. He asks us to work, to try, to pour ourselves out to make things better. But he is an actor in history also. He chastises and rescues, he intervenes in ways seen and unseen. Or chooses not to.

Twenty sixteen looks to me like a chastisement. He’s trying to get our attention. We have candidates we can’t be proud of. We must choose among the embarrassments. What might we be doing as a nation and a people that would have earned this moment?