KQ Article

I am lucky enough to live in a beautiful patch of woods in southern Indiana, and one of my great pleasures is to watch the wildlife and forest outside my office window. The weather can change quickly here. Native Hoosiers say that if you don’t like the weather now, just wait an hour or two.

I can also watch the regular cycle of seasons. This varies a bit in timing from year to year, but whenever the redbuds come out, you know spring is on the way. Having lived in the same house for twenty years, I can see a third type of change. Winters are getting warmer. There is less snow. Summer is coming earlier. Our global climate is changing.

The relatively new discipline of systems theory has names for these three kinds of change. First, weather is random noise, produced by a chaotic atmosphere. Second, seasons are cyclic fluctuations around a mean, driven by positive and negative feedback. And third, global warming is a secular change, or a transformation of the underlying forces that drive the whole system.

The economy has exactly the same three levels. Markets fluctuate all the time in unpredictable ways, following a longer-term cycle of recession and recovery, growth driven by rising profits, more employment and greater investment, and then contraction. But what about the equivalent of meteorological climate change? This would have to be our expectation that the long-term trend of the economy is always going to be growth — that regardless of what happens in the short term, the next generation is going to see a bigger economy, higher incomes and more consumption.

A CLEAR CHANGE IN DIRECTION
Important new research in economics, and my own specialty of economic anthropology, tells us that markets are fundamentally products of our beliefs. Such beliefs include our confidence in the soundness of money, our trust in the honesty and solidity of institutions, and our expectations for the future.

This is why past recessions, and even the Great Depression, have always been followed by recovery and new periods of growth and abundance. Recession creates fertile ground for recovery because people defer their expectations, expecting that once things start to turn up, they will do better — and they deserve it because they had to tighten their belts. This belief in progress and long-term growth is so basic and fundamental to the way we think about our world that we rarely question it.  For my generation, this is the very bedrock of American prosperity, our confidence in our way of life.

But there is good evidence to suggest that we are in the midst of a secular change in direction, a fundamental shakeup in the way people think about the future — global economic climate change.

Since the famous Christmas photo of 1968 taken by the Apollo 8 astronauts showing the whole Earth rising over the moon, generations have been raised with a more global consciousness, an understanding that the world has limits, and that growth cannot go on forever without consequences. Everything people see and hear in the news about global warming and peak oil production only confirms that things cannot keep growing indefinitely. And when people’s beliefs change, this has a concrete effect on the economy.

Surveys show that roughly 88% of my freshman students at Indiana University believe that “protecting the environment is going to require us to make major changes in the way we live.” Study after study shows declining numbers of Americans believing that their children will be more prosperous and live in a better world. So this recession may be different, signaling not just another cycle, but a real change in direction.

Previous recessions have strengthened people’s belief in the American dream of progress and abundance. This  one might actually change the dream itself.

PREPARING FOR THE NEW BANKING CONSUMER
What does this mean for a financial professional? A trend toward stability offers a very different environment from one where long-term growth is always assured. This new environment may provide opportunities for innovative products that stress adaptability and flexibility. We might expect younger investors to be more concerned with security instead of growth, and to be much less trusting of financial institutions of all kinds.

Younger investors might also be more active and less likely to sit and wait for some longterm increase in value that may never come. They may be willing to invest in the parts of the world where rapid growth is going to be concentrated in the future. We can expect that “green” and “sustainable” credentials are going to keep growing in importance for businesses, and that buyers will demand clearer and more transparent information on where their investment dollars are really going.

And finally, restoring trust and confidence in the financial marketplace is not going to be easy or straightforward, but it must happen. And new relationships may be very different from the kinds we have been used to, because our biggest underlying assumptions about the economy have been challenged — and may have changed forever.