Sailing uncharted waters with Kondratiev Wave Theory
On my journey through the financial realms, I was trying to work out what is happening with our economy and the global economy, which are both entering a stage of recession and depression. After months of reading various books and newspapers I have finally found a theory that may actually be correctly predicting recessions and depressions. What is this theory I hear you cry? It is the Kondratiev wave theory, which has correctly predicted the last four recessions and depressions. Not bad for a theory I say!
Nikolai Kondratiev was a Russian born economist, he proposed that western economies work in super-cycles, each cycle lasting between 50 to 60 years. Each cycle consists of an age of prosperity, recession, depression and improvement. Western capitalist economies have long-term cycles of boom followed by depression. These economic cycles are now called “Kondratiev waves” or grand super cycles.
Looking deeper into the Kondratiev waves
It is quite interesting how Kondratiev constructed his theory. He observed particular characteristics about the growth and decline of the long wave. As he was researching his theory he detailed the number of years that the economy expanded and contracted during each part of the half century long cycle. He investigated the industries that suffered the most during a down wave and found out how important a role Technology plays in leading out of one downward wave into the next upturn wave. When Kondratiev developed his theory he also researched the 50-54 year catastrophes and renewals which where known and observed by the Mayans and independently by the ancient Israelites. These observations learned by ancient cultures lead Kondratiev to developing a modern expression of this super-cycle. His calculations indicate that capitalist countries tend to follow a long rhythmic pattern of approximately half a century of growth and decline.
How long does the grand super cycle last wave last?
The wave which averages about 54 years in length, begins with the up wave (improvement) whereby prices rise slowly along with a new economic expansion. This lasts around 25-30 years, with inflation running at a very high level during this period. When this expansion peaks it creates a foundation for a deep recession that suddenly jolts the economy. This is the time when commodity prices break from their highs and the prices can plumb low depths that would have been unimaginable during the ‘good’ times. This can last for a long period. However it is not all doom and gloom, with prices eventually stabilising as the economy recovers. This is the beginning of a period of selective expansion that will normally last 10 years.
The most scary aspect of this current wave-if Kondratiev is correct, is the possibility of a rapid decline from recession to depression in most major economies. We appear to be entering a period of deflation that could last until 2024. The signs are already there and it is a hard to turn a blind eye to his theory. Already on the news we are seeing that this is the “Worst Recession in a 100 years!” so welcome to the age of the recession/depression- hold on to your seats its going to be a bumpy ride. On the downside, each mega-inflationary period had its own ‘crazy’ dealers. In the 1700’s it was the South Sea Bubble with people believing that mega sums could be made on the Spice trade with the Far-East, during the 1920’s depression it was the desire to borrow money and invest on the possibility of an-ever-rising stock market.
What happened to the share prices?
As share values plummeted so did any ‘value’ that people had within these shares, leading to the Depression. In the Late 90’s the bet was on Technology stocks and that led to another mini-depression. This time it was the belief that house prices would forever defy gravity-so the debt on them based on their asset value was sold around the world to banks and investors by hedge funds. Of course nothing defies gravity and at some stage matters come to a head and bubbles burst! So are Kondratiev waves a function of the way people ‘perceive’ reality in the financial world? When confidence is high we ride the wave and when confidence is low-we drown? Remember it is the up-turns that have created the prosperity that we bathe in currently-so everything is not as bad as it seems. However if you lose your job then this is scant comfort.
The only possible glint on the horizon maybe that Kondratiev had not factored in the complex mathematics of the crazy hedge fund dealers who have basically caused this particular downturn. Also compared to the past we are working within a global arena and it is quite possible that a sensible global stimulus could get us out of this cycle much sooner than expected. This is where Obama’s gamble of injecting money into the USA economy could help to create stability for the next growth phase in the whole world. We should also factor in the issue of global warming and the urgency to deal with this that could create a new era of slow steady, sustainable stable growth. The other side of the coin may be that we no longer grow madly like we did but we live in a sustainable manner. In many ways this wave is very different from the past ones that Kondratiev studied. As political pundits say-‘It’s the Economy, stupid!’.