Sunday, March 16, 2014

A thought for Sunday: society is most vulnerable to those things of which it has no firsthand memory

 - by New Deal democrat

A theme of several political and economic articles I have read in the past few days is the notion of an inflection point, where suddenly the paradigm shifts.

For example, Atif Mian and Amir Sufi wrote that there was a increase in household credit debt before the Great Depression, a discovery sufficiently profound that Mark Thoma included it in his daily links.  Which is interesting, because I wrote all about the 1920s credit bubble over six years ago, explaining how changed social attitudes about credit led to an explosive increase in installment debt in the 1920s, whereby furniture and appliances were purchased on time, where even one missed payment would give rise to repossession. When the downturn of 1929 hit, households cut back on purchases en masse in order to protect their existing possessions -- which only created a vicious cycle.

Similarly, the New York Times today has an article applying game theory to the Crimea/Ukraine crisis, in which it is explained that
In a recent blog post, Jay Ulfelder, a political scientist, noted that for the last 25 years the world has seen less violent conflict than might have been expected, given local conditions. Lately, though, peaceful settlements have been harder to find. This change may just reflect random noise in the data, but a more disturbing alternative is that conflict is now more likely.
Why? The point from game theory is this: The more peacefully that disputes are resolved, the more that peaceful resolution is expected. That expectation, in turn, makes peace easier to achieve and maintain. But the reverse is also true: As peaceful settlement becomes less common, trust declines, international norms shift and conflict becomes more likely. So there is an unfavorable tipping point.

Back when I blogged at Economic Populist, Rob Oak used to tell me that my posts on the Kondratiev cycle drew the least reads.  Which is a shame.

Because the Kondratiev cycle, the credit bubble of a the last several decades, and the Ukraine crisis are all demonstrations of the same long term phenomena.  That is, that society is most vulnerable to shocks of  the type of which it has no firsthand memory.  

World War 1 occurred after a century of nearly complete European peace.  The only major war after the Napoleonic War that ended in 1815, was the Franco-Prussian War of 1870, and that was both brief and decisive.

By the time 1914 came around, nobody in Europe had any living memory of a protracted, destructive, major war.  Since the living memory was gone, governments made all the mistakes that those who actually lived through a major war would have avoided.

Similarly, by the 1990s and 2000s, the living memory of the 1920s credit bubble was gone.  Yes, there might be some old codgers who would lecture their grandchildren about the evils of too much debt, but what did they know?  Times had changed.  Except of course, as it turned out in 2007-09, they hadn't.

Back in the 1970s, graphs showing how the sky-high interest rates then current "demonstrated" that the Kondratiev wave had no value, were published in investment books.  Except right on time in 1981 interest rates peaked,  almost exactly 60 years after their prior secular peak.  This is treated by most as strictly chance, although since then we probably had a secular low in 2012, 64 years after the prior secular low in 1948. We won't have a serious threat of inflation until the 2030's, by which time those of us who remember the 1970s will be old codgers shouting at clouds, or will have passed this mortal coil.

And the last naked major land-grab in Europe took place in 1945, as Stalin de facto annexed Eastern Europe to the Soviet Union.  Of course, it was Hitler's land grabs in Austria, the Sudetenland in Czechoslovakia, and finally Poland, which ultimately caused World War 2.  That was 70 years ago, and nobody under the age of 75 has any living memory of that event.

Which means I disagree with Jay Ulfelder.  Peaceful resolutions beget peaceful resolutions only up to the point that enough of the prior generation which remembers a major war is gone.  Once that point has been reached, many or most of the players will put their collective guards down, leaving them flatfooted in the face of the first major old-fashioned aggressive annexation. Now that Putin has successfully annexed several smaller pieces of the old Soviet Union without meaningful consequence, and is about to annex Crimea, Europe and the US are shouting about economic sanctions.  If I were Putin, I would be thinking, "they are already going to their maximal response.  I have nothing to lose by also annexing part or all of the remaining (militarily helpless) Ukraine."

The Millennial generation well understands the problems of excess credit and of laissez faire capitalism.  Those problems will not advance further and are likely to be pushed back dramatically during their watch.  But they don't remember inflation.  And no living generation today except for the very old remember World War 2.

Which is exactly why the world is becoming increasingly vulnerable to  acts of naked aggression, and  a resulting conflagration.