In February 2012 I wrote an essay on the fascinating and timeless work of Nikolai Kondratieff with a brief introduction to long-term economic cycles known as Kondratieff waves or K-waves (see here).
As I explained at the time, the K-wave is a 60-year cycle (+/- a year or so) with internal phases that are sometimes characterized as seasons: spring, summer, autumn and winter:
- Spring phase: a new factor of production, good economic times, rising inflation
- Summer: hubristic 'peak' war followed by societal doubts and double digit inflation
- Autumn: the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
- Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression. A 'trough' war breaks psychology of doom.
Based on the historical pattern and where we are currently in the cycle, it would appear that the global economy is struggling in the midst of a winter phase, with the bursting of the tech bubble serving as the transitional starting point, as shown below:
Harkening back to the 2012 piece, I wrote:
If we accept the fact that most winters in K-cycles last 20 years (as outlined in the chart above) this would indicate that we are about halfway through the Kondratieff winter that commenced in the year 2000. Thus, in all probability, we will be moving from a "recession" to a "depression" phase in the cycle about the year 2013 and it should last until approximately 2017-2020.
As we all know the American stock market has not collapsed but moved to new highs since that time. So what is the explanation? Let’s review.
First of all, it is pretty clear that an important secular shift towards lower growth did indeed take place from 2000 onwards among the advanced economies of the globe, which was temporarily offset by an investment-led spending boom in the US housing sector and more broadly in various emerging economies.
However, once the predominant economic fundamentals reasserted themselves after the collapsing US housing market and subsequent Global Financial Crisis, the Fed and numerous central banks recognized the overpowering wave of potential deflation, deleveraging, and depression seen during a Kondratieff winter and reacted in kind with an unprecedented level of stimulus.
This level of central bank intervention worldwide has completely skewed the operation of the free markets. The consequential low interest rates and the availability of easy money to large banks and institutions have resulted in a “corrupted” price formulation for commodities, real estate, stocks and bonds. Thus, when we would be normally experiencing a deep price contraction, we instead have financially-driven booms across most asset classes.
As every follower of Ludwig Von Mises knows when you manipulate the pricing mechanism of the free market nobody knows the true value of anything anymore and accordingly resources become mis-allocated. Most K-wave theorists observe this development with grave concern. They know that there have been nearly 18 K-wave cycles in world economic growth since 930 AD and the current manipulation of “natural” prices is only going to make the current Kondratieff winter more catastrophic when it really takes hold. In other words, the K winter cycle has been pushed out, but it has not been eliminated.
Anyone who does not realize that the US is actually in a near depression should look at the chart below. The level of central bank “ownership” of the US economy is now above where it was in the 1929 Great Depression levels.
Historical View of Federal Reserve Balance Sheet
How long financial engineering, interest rate swaps, and stock buybacks can be used to fudge the economic “greater recession” we are living through is anyone’s guess.
When, due to the potential bankruptcy of the central banks of Japan, the EU, England and the US the current musical chairs of floating currency wars, negative interest rates and quantitative easing stops, my intuition tells me the true nature of our economic vulnerability will become visible for all to see.
It is my contention, as mentioned in the last essay, that the current “recessionary” reality should be accepted for what it is, i.e. a depression, and dealt with through honest policies rather than through “smoke and mirror” QE delusion. World leaders must accept the reality of Kondratieff’s credit cycle discovery and let the current “natural” international credit contraction take its course.
The essential cause of the current K-wave winter is a natural by-product of collapsing growth, high debt, labor obsolescence, falling incomes and contracting employment. The type of enlightened policies needed to deal with the crisis are:
- Ordered debt liquidation and restructuring
- Promotion of creative development
- Limitation of government regulation, taxation and control
- Efficient market pricing and asset allocation
- Availability of new non-debt money to finance real growth, efficiency and productivity
- Distribution of purchasing power through fair wages and conditions
- Promotion of a new banking system based on sustainable economic growth rather than negative money
The current policies being endorsed by the likes of the European Union are the antithesis of the above. Instead of debt liquidation we have debt sustained by additional debt. Rather than have wage growth we have zero hour contracts with no minimum wage protection. Instead of the promotion of new industries with cutting-edge research and development we have existing conglomerates stifling innovation through pork barrel regulation and repressive government control.
The longer the inevitable K winter is ignored, the more violent will be the eventual political, social and economic collapse. As the famous character Chauncey Gardner said in the classic movie Being There: after the winter, “there will be growth in the spring”. However, we must be courageous enough to allow the current K winter to become fully manifest for this re-growth to occur anytime soon.
Crushing legacy bank debt is the problem. Debt liquidation through deep economic contraction is the solution. As long as this Kondratieff truth is denied the longer will be the delay in the commencement of world reinvention, renewal, rebirth and expansion.
- St. Louis Fed: “The Rise and Fall of the Fed’s Balance Sheet”.
- Lowell Ricketts & Christopher J. Weller, Jan. 2014.
- Financial Sense: “Kondratieff Waves and the Greater Depression 2013 -2020”
- Christopher M. Quigley February Feb. 24 2012.
K Wave Chart: Courtesy of Longwaveanalysis.ca
© 1st. May 2015 Christopher M. Quigley
Related podcast interview:
Christopher Quigley: What Dow Theory Says About the Stock Market