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Check out the 3 articles on K waves
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Regards
Dougal
July '99 Focus:
Kondratieff Waves
Part One: The Long Wave Goodbye?
"It was a requirement amongst the ancient Jewish people that every fifty years the Chief Rabbi blew on a ram's horn to signal a jubilee. Although Leviticus Chapter XXV describes this as being a holy year when fields were left fallow, the grapes unharvested and all returned to their home, it also had a very important commercial function. A jubilee was the signal for debts to be forgiven, those sold into bondage released and prices to be adjusted according to the number of good or poor harvests. In short it was a year for unwinding pent-up debt, misunderstandings or sharp practices that had built up over the previous fifty years. Would that we had the same today."
- William Houston, "Riding the Business Cycle".
Nikolai Dimitriyevich Kondratyev (or Kondratieff as he is widely known outside Russia), remains - more than 65 years after his death in 1932 - one of the most controversial figures in 20th century economics. It was Kondratieff's name which Joseph Schumpeter attributed to the analysis of the long wave cycle.
Indeed, early work on long wave cycles was undertaken by Schumpeter in 1911, and then by the little known Dutch Marxist economist J. Van Gelderen (pen name "J. Fedder") in 1913. Van Gelderen noted a long wave of around 50 - 60 years with particular emphasis on the fact that production, prices and economic activity appeared to increase between 1850 and 73, before declining to a low in the 1890s. Another Dutchman, S. De Wolff, confirmed Van Gelderen's results in 1924 using more technical methods of statistical analysis.
It appears Nikolai Kondratieff had developed the same idea of a long wave economic cycle independently in 1922. Not content with his initial results, he collected and analysed all the time series he could find which covered long periods. His results agreed substantially with Van Gelderen and de Wolff and were published in Russian in 1925.
Kondratieff, who worked at the Agricultural Academy and the Business Conditions Institute in Moscow during the 1920s, had been charged with analysing capitalist economies - reportedly to prove their inevitable decay according to communist dogma. He was removed as head of the Business Conditions Institute in 1928 by a Stalinist purge, as the results of his research simply didn't fit in with the Communist Party's view of the world.
As I have commented previously in ADT, it is a remarkable tragedy that one of the more innovative economists of the 20th century - who appears to have researched something that could be of benefit to us all - should be sent to Siberia to die in the freezing gulags, when there are now thousands of journeyman economists (if that's not tautology) in the worlds of academia and trading.
Anyway, Kondratieff's work was first published outside Russia as "Die langen wellen der konjunktor", and subsequently in English as "The Long Waves in Economic Life". Interestingly, according to William Houston in "Riding the Business Cycle", Kondratieff himself was astonished by the results of his research: "Instead of forecasting failure, he predicted that although capitalism would suffer a decline in the 1930s, it would recover once again in yet another cycle. This was most unwelcome news to his Bolshevik bosses who condemned him to a solitary death in Siberia".
While the Soviet Russian state claimed that the concept of a long wave cycle which refreshes capitalism through a purge of existing excesses was "reactionary and wrong," Kondratieff himself had earlier described the cycle in these terms:
"The upswing of the first long wave embraced the period from 1782 - 1814 - that is, 25 years. Its decline begins in 1814 and ends in 1849, a period of 35 years. The cycle, therefore, was completed in 60 years. The rise of the second wave begins in 1849 and ends in 1873, lasting 24 years... The decline of the second wave begins in 1873 ending in 1896 - a period of 23 years. The length of the second wave is 47 years. The upward movement of the third wave begins in 1896 and ends in 1920, its duration being 24 years. The decline of the third wave, according to all data, begins in 1920."
Note that Kondratieff himself regarded the waves as being of an average length of 50 years. Each of the 3 Long Waves he calculated had two components:
An upswing with increasing prosperity punctuated by some bouts of recession; and
A down wave following the up wave, with generally declining economic activity.
Anecdotal evidence for the Long Wave is also evident in the pre-industrial age. "The Great Reckoning" also notes that records of the mintage and fluctuating values of Italian coinage from the Middle Ages "forcefully bring out the evidence of both secular change and long waves".
Leading Elliott Wave guru, Robert Prechter makes extensive use of Kondratieff waves to back up his thesis that a crash in equities and assets and indeed the economy generally is looming... However, despite the massive theorising of everything from consumption patterns and capacity utilisation through to credit / debt liquidation, generational differences in experience with / without debt or inflation or whatever, Prechter notes:
"The associated phenomena may appear causal but they are actually results of patterns of mass psychological change as reflected by the cycle. There are many cycles smaller and larger than the Kondratieff cycle. Does the 3-week cycle have anything to do with inventories and debt? If not, then why should the 54-year cycle be fundamentally different? As I see it, all cycles result from the natural workings of social psychology."
Through studying the 5 K-waves to date, Prechter adds that "the progression of financial events through each one is the same, although the timing of events within each cycle varies".
After the trough, an economic expansion takes place. This is accompanied by stable monetary conditions, or perhaps mild inflation, coupled with rising capital markets. After a couple of decades, the forces of inflation begin accelerating, leading to rises in the prices of physical goods. At this stage, capital market prices tend to go sideways or down (i.e. substantially falling in inflation-adjusted terms). After somewhere around a decade or more, the end of the high inflation period is marked by a significant recession in business activity.
The aftermath of this recession is referred to as the "plateau" period, when a decade or so of disinflation - or even mild deflation - takes hold, while capital markets show staggering rises against a generally healthy, expanding economy. The plateau is followed by a severe deflationary period, in which the prices of assets, capital markets and physical goods fall, provoking an economic depression. During several ensuing years of debt liquidation, the economy effectively resets itself for the next cycle.
A - Stocks rising and economy expanding.
B - Inflation benefits paper assets but falling physical asset prices.
C - Recession
D - Disinflationary phase. Stocks and bonds rise rapidly, economy expands mildly.
E - Deflationary phase, stocks and physical asset prices falling.
F - Depression
In the following parts of this Focus, we will examine the likely impact of the K-wave on the current economy and financial markets, as well as discussing if it really does exist.
Patrick Young
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