Crusty old bureaucracy theory
How is it possible for prices to fall, even during a financial crisis?
The explanation is what I call the "crusty old bureaucracy" theory.
There is a long-term generational cycle in business, where there is a "great depression" every 70-80 years or so. In American history, a British banking failure in 1772 sent most New England businesses into bankruptcy, providing a monetary motivation for the Revolutionary War. The Panic of 1857 bankrupted many American and European businesses, leading to the Civil War. And of course the Great Depression of the 1930s was one of the causes that led to World War II.
From the point of view of Generational Dynamics, here's what's going on: During the 1930s Great Depression, most old businesses went bankrupt, and every new business was "lean and mean," with every employee required to pull his full weight.
In the intervening 70 years, these businesses have all been getting calcified with bureaucracies, older employees who are waiting around for retirement, middle aged employees whose job skills are obsolete, or whole departments or divisions producing products and services that people no longer want. Therefore, the average American business today is producing too many overpriced products that nobody really wants. The same calcification process has also happened with government agencies, universities, and all other organizations. This is what I call the "crusty old bureaucracy" problem.
So the economy will "correct itself," but will do so by a major adjustment like the crash of 1929. This will force all the existing businesses into bankruptcy, and the cycle will repeat with the creation of new "lean and mean" businesses. Unfortunately, the side effects of massive homelessness and even starvation will also occur.
Another side effect is that products have been getting gradually obsolete, and this has been happening on a national basis. In the extreme, once enough businesses are producing obsolete products, inflation can't increase because no one will want the products at any price. The only way to fix the problem is through massive business bankruptcies and a new set of businesses.
In the current economy, one of the most visible examples is music CDs (compact disks). There's a huge chunk of business associated with manufacturing, distributing and selling CDs. However, CDs are becoming increasingly obsolete, because people want their music on their computer, and don't want CDs around cluttering up their homes. In other words, people don't want CDs at any price. CDs is one example, but you can easily think of many more examples in other domains where computerization are making products obsolete, or at least way overpriced. After the financial crisis, it will turn out that there are many products like that, and so prices will remain low and inflation will remain low.
Life in the next few years
We're at a unique time in history, about 60 years after the end of World War II, when every country is experiencing the same generational change at the same time: The people in the generation that fought in WW II are all disappearing (retiring or dying) all at once, and are being replaced by the people in the generation born after WW II. This new generation has no personal knowledge of the horrors of World War II, and will lead the world into a new world war. As I've described in the discussion of the six most dangerous regions of the world, the time is not too far off when a regional war in one of these regions will trigger a much wider war that will engulf America and the world.
You can see this happening today especially in the Northern Pacific, where the level of conflict is increasing on an almost daily basis, and both China and North Korea are evidently planning preemptive wars of reunification (with Taiwan and South Korea, respectively). These wars might begin next week, next month, next year, or thereafter.
What will life be like for the next few years? It turns out that we have a pretty good idea. Historians William Strauss and Neil Howe have studied what's happened in previous American crisis periods, and have published their findings in two books, Generations and The Fourth Turning. In fact, their generational theory forms the basis of Generational Dynamics.
Based on what happened during the previous crisis periods -- World War II, the Civil War, and the Revolutionary War, they tell us (in The Fourth Turning, p. 258) what's going to happen:
Private life will transform beyond prior recognition. Now less important than the team, individuals are expected to comply with new ... standards of virtue. Family order strengthens, and personal violence and substance abuse decline. Those who persist in free-wheeling self-oriented behavior now face implacable public stigma, even punishment. Winner-take-all arrangements give way to enforceable new mechanisms of social sharing. Questions about who does what are settled on grounds of survival, not fairness. This leads to a renewed social division of labor by age and sex. In the realm of public activity, elders are expected to step aside for the young, women for men. When danger looms, children are expected to be protected before parents, mothers before fathers. All social arrangements are evaluated anew; pre-Crisis promises and expectations count for little. Where the Unraveling had been an era of fast-paced personal lives against a background of public gridlock, in the Crisis the pace of daily life will seem to slow down just as political and social change accelerates.
When society approaches the climax of a crisis, it reaches a point of maximum civic power. Where the new values regime had once justified individual fury, it now justifies public fury. Wars become more likely and are fought with efficacy and finality. The risk of revolution is high -- as is the risk of civil war, since the community that commands the greatest loyalty does not necessarily coincide with political (or geographic) boundaries. Leaders become more inclined to define enemies in moral terms, to enforce virtue militarly, to refuse all compromise, to commit large forces in that effort, to impose heavy sacrifices on the battlefield and home front, to build the most destructive weapons contemporary minds can imagine, and to deploy those weapons if needed to obtain an enduring victory.
One of the political consequences is that programs like Social Security, Medicare and Medicaid will be discontinued or substantially cut back. In a time when the survival of the nation is at stake, the needs of the elderly will have to give way to the needs of the young. By 2010, it will be very difficult for a non-wealthy older person to survive comfortably.
This is the kind of world we're headed for. It won't be the end of the world, but it will be worse than the horrors of the Great Depression and World War II. America has gone through this kind of thing three times before, and will do so again.
As I've done before, I'm cautioning all my readers to be taking steps to protect yourself, your family and your nation. The world today is much worse than it was a year ago, and things are getting worse every day. The public debt situation and the level of world conflict grow, and more and more commentators are noticing it. We must come together as a nation to protect one another, because we are going to have no choice.
