Written by Bryan Lutz, Editor at Dollarcollapse.com:
Individual investors are scrambling to regain a sense of stability, security, and peace of mind in the financial markets. Pallavi Rao of the Visual Capitalist created a chart to demonstrate the now seeming cyclical pattern of rapid investment by the “average joe.”
(source: https://www.visualcapitalist.com/charted-u-s-retail-investor-inflows-2014-2023/)
Could this be a systemic version of Gersham’s Law? Gershams was a 16th Century English Financier, who theorized that “bad money drives out the good money.” Essentially, when there are two forms of legal currencies in circulation, people will hoard the good money and leave the less valuable currency in circulation.
Retail investors are thinking one of two things, or both. After the Banking Crisis in the first quarter of 2023, they could be losing good faith in banks. However, that doesn’t account for the previous three years.
And two, they could be losing faith in the Federal Reserve system itself. One thing is for sure, retail investors are reaching for “something.”
While the Visual Capitalist’s data above covers net inflow of retail investments in a different way, the Federal Reserve Economic Research shows Retail Money Market Funds after 2020 spiking. Retail Money Market Funds are filled with retail investor preferences in short-term debt like 2-year Treasury bonds, and corporate or commercial real estate bonds.
Whatever their choices may be, individuals are attempting to create order for themselves. Even though they may not be well aware of the failure of the Keynesian system itself, individuals still want order. We could also say that because of the current state of the world, the demand for order and stability is increasing substantially.
If you are familiar with William Strauss and Neil Howe’s book, The Fourth Turning, then you will recognize the cyclical pattern of supply vs demand of order in the chart below.
The chart’s creator uses the ‘The Fourth Turning’ cycle model on the X axis. And ‘Order’ on the Y axis. The red line marks the demand for order, while the blue line marks the supply of order.
The chart is not perfect, but it is useful. Lines on the chart change with supply and demand as societies move from one Turning to the next, and each new generation takes up the mantle of leadership in institutions.
The supply and demand of order throughout the four Turnings:
(Source: Nick Ward on Twitter: @nckbtc)
The First Turning
The First Turning occurred during the 1950s in the highest amount of social order. Political and economic institutions provided the stability the nation needed, but the values that formed them became rigid.
The supply and demand for order were at their highest because we valued the USD as a necessary part of the monetary system. At the end of World War II, the USD satisfied the demand for global order, even to the point of establishing rigid social norms in the generation that made them. As a result of rigidity the children of leaders in the First Turning think, “there must be other ways.”
The Second Turning
In the Second Turning, there is an awakening. The next generation wants independence from the ways of their rigid parents. So the demand for order decreases. As did the perceived value of a gold-backed USD.
Political institutions began to claim responsibility for the equality and prosperity of the nation. As a result, a gold-backed USD became less important to individuals. Instead, institutional leaders in the Second Turning demand change from the political institutions established in the last generation.
Then political institutions slowly decay. And this is eventually reflected in the monetary policies a la the new fiat monetary system of 1971.
The Third Turning
When President Richard Nixon took the USD off the gold standard in 1971, the Second Turning was nearing completion. You can see in the chart above that both supply and demand of order fell quite rapidly.
Now if you look at USD and other fiat currencies priced in gold you can see this:
The world’s new fiat currencies couldn’t hold their value. In a matter of ten years the USD quickly drops, and they suffer a long decline. As did the supply of order.
When the supply and demand of order are at their lowest, the economic foundations of a nation break.
For example, you might remember the prosperity and recession of the 1980s. While there was newfound unprecedented prosperity from meddling with the money supply. Political Institutions were not willing to accept the decline because, in all appearances, “everything is fine.”
Yet, looking at the bigger picture, nothing was “OK.”
The 80s produced one of the most memorable recessions in US economic history.
Paul Volker, the Federal Reserve Chair at the time, hit the brakes by raising interest rates, creating mass unemployment, and fueling social unrest.
Some American politicians had more than likely anticipated this. They attempted to tether the USD to oil by securing trade agreements in the Middle East, forcing the world to buy oil in USD.
Here’s what pricing stability looked like for oil in USD versus gold:
You can see that when the USD was tethered to gold, oil and gas prices were relatively stable. This is just one example of the declining supply of order. When a stable economy fails to supply order, we look to politics.
American politics moved to control energy supplies and establish military bases around the globe to secure their currency’s dominant position by force. Though for a time, this was an expression of dominance, the US economy was on the decline.
Unfortunately, as the supply of order decreased internally, the United States began experiencing a growing wage gap, increasingly frequent boom and bust cycles, and sovereign debt crises and now unprecedented inflation.
Externally, the US manipulated state actors to start wars and engaged in military adventurism all around the world.
The Fourth Turning
In the Fourth Turning, individuals begin to establish order for themselves except not by the political institutions, not yet. At first, a small percentage of the population no longer trusts the government to provide order and stability. Individuals begin to experiment. So they buy bonds, they buy gold and silver and in today’s turning, some buy blockchain technologies like Bitcoin.
While the demand for order increases, we will most likely see the value of hard assets drastically increase. Since retail investors cannot trust political institutions for order, they will seek economic stability for themselves. You can see the decline of institutional investors and corporate hedge funds (while retail trading is beginning to take off) in the chart below:
While retail investors have the means to manage their own investments through no-fee platforms, the purchasing of physical gold and silver, as well as cryptocurrencies, economic instability and war will only push investors towards further self-management. So they can create order for themselves until the Fourth Turning becomes deadly enough to unify nations, and re-establish another First Turning.
