It is strange to actually live in a society experiencing a structural-demographic crisis, after studying many examples of such crises in the past. Unfortunately the crisis is developing largely according to the classical pattern. The degree of political polarization is at its highest levels since the (First) American Civil War. Intraelite infighting is tearing the Republic apart. There has already been at least one sacrificial victim (see my post Days of Rage). In general, things are falling apart faster than I expected. But this is the nature of political violence outbreaks: they are like earthquakes in that pressures for them build slowly and fairly predictably, but the actual timing of the quake is very difficult (probably impossible) to predict with any accuracy (see my explanation here).

My prediction for a violence spike peaking in the early 2020s, which I made a decade ago, was based on structural, slowly developing drivers. The most fundamental structural-demographic force is labor oversupply which drives popular immiseration and (after a lag) elite overproduction. Both of these trends are already at levels that they previously reached during our first Age of Discord (see graphs here). But these trends require decades to build and subside, so what helped me to pinpoint the time frame of the crisis to the early 2020s?

One of these faster moving drivers is demographic: the numbers of people aged between 20 and 29 years old. This is the age group that typically supply the shock troops to each of the warring sides in revolutions and civil wars. We are currently in the middle of this “youth bulge” (it will start subsiding after 2020).

Another important factor is economics. The dynamics of economic growth in capitalist societies is very complex. There are a suite of cycles or, rather, boom-bust sequences, as these “cycles” don’t have fixed periods. Instead, they tend to operate on “characteristic” time scales, ranging from years (the business cycle) to decades. One of the most important longer cycles is known as the Kondratiev Wave, because it was first described by the Russian economist Nikolay Kondratiev. Most economists don’t believe in the reality of these “K-waves” that recur every 40-60 years. However, Kondratiev recognized the cyclic pattern in the 1930s, and since then we’ve had two more K-waves, happening pretty much as he hypothesized. It’s actually one of rare economic predictions that have been supported by the subsequent history.

We are currently living during a negative phase of the current K-wave (sometimes known as “winter”), which is associated with stagnating economic growth, unwillingness of business to invest in production, high unemployment, and a general pessimistic mood. According to Russian researchers (like Korotayev, Akayev, and others) the current K-wave should turn around during the mid- or late 2020s. So “winter is here” for the next 5-10 years.

There is also a 50-year cycle of political violence, which I have termed “fathers-and-sons” cycle. Since the last spike was c.1970 (which was preceded, by other spikes in c.1920 and c.1870), the next one should come around 2020.

These and other drivers, which I considered 10 years ago, pointed to the early 2020s as the period when the American social system would be experiencing the greatest stresses (which historically usually end in revolutions and major civil wars). But what I haven’t explicitly considered is the role of finance economics in contributing to the crisis.

This is why I found the recent book by Steve Keen, Can We Avoid Another Financial Crisis?, so interesting and illuminating.

Steve is one of the “heterodox economists” (meaning that they are pretty much ignored by the mainstream). His starting point is the theory of Hyman Minsky (another economist who was largely ignored by the profession). Minsky’s theory makes a lot of sense to me, however. Let me try explain it in one paragraph.

The main dynamical driver is the magnitude of private debt (combining what’s owed by both corporations and households) in relation to GDP. Currently this indicator is at 150% of the US GDP. Why is it bad?

Actually, for a while, as private debt grows, things are just fine because expanding credit drives economic growth (think of new housing construction during building booms). But eventually the cost of servicing accumulated debt starts to depress consumption (the more you pay for your mortgage, the less money you have to buy things). Falling consumption results in overproduction of goods and declining profits for businesses, which makes investment a losing proposition. Credit collapses, businesses go bankrupt, or downsize their labor, less employment means even less consumption, and (absent large-scale increase in government spending) the economy enters a downward-trending “death spiral” of a prolonged depression.

The precise timing of the turn-around point is very difficult to predict (it’s another example of earthquake-like dynamics). Yet Steve Keen is one of very few economists who predicted the General Financial Crisis (GFC) of 2007–2008.

If Steve is right in identifying the main cause of the GFC, then we should listen to what he says in the book about the likelihood of another crisis in the next few years. Unfortunately, the news is bad, because we are still at a very high level of private debt in relation to GDP.

I suspect that the Minsky model of Steve Keen would be a good fit with other models on which the structural-demographic theory rests (“suspect” because I haven’t yet looked into the actual equations). More generally, financial crises are a recurrent feature of structural-demographic crises, and I think I understand why (this, though will have to be deferred to a future post).

I think that Can We Avoid Another Financial Crisis is an important book. It is not an optimistic story. If Steve Keen is right, labor oversupply will not abate in any near future. This means popular immiseration will continue to increase, driving the rise of more politically entrepreneurial elite aspirants, ever greater polarization, and political violence. In other words, the current prognosis is a gloomy one.