Tuesday, August 23, 2016

"Nikolai Kondratiev's 'Long Wave': The Mirror of the Global Economic Crisis"

"Nikolai Kondratiev's "Long Wave": The Mirror of the Global Economic Crisis"
The Global Economy is Facing a "Long Wave" Recession
by Alexander Aivazov and Andrey Kobyakov
"We bring to the attention of readers a study by two prominent Russian economists on Kondratiev's "Long Wave". The Long Wave Theory of Nikolai Kondratiev, first formulated in the 1920s, constitutes an important landmark in economic theory. As to whether it is useful in understanding the current global economic crisis, however, is another matter. The K cycle approach posits a regular long cycle. It tends, therefore, to ignore the deliberate process of market manipulation which characterizes the current financial crisis."
Full article here:
"What Is a Kondratiev Cycle? Who as Kondratiev?: To introduce the Kondratiev Theory, we must go back over seventy years and examine a remarkable story in economic history, encompassed within the life of one still little known man. I am certain that, in time, Kondratiev will rank with the giants of discovery as Einstein, Newton and Keynes. Like these men, his insights have begun to alter radically and permanently our perceptions of economic history. Professor Nikolai Dmyitriyevich Kondratiev (or, "Kondratieff", "Kondratyev" pronounced "Kon-DRA-tee-eff") was a Russian economist of the early 1900's and a pioneer of dynamic economic theory. Having almost a free hand for research, Kondratiev produced ground breaking theories interrelating economics and politics, taking into consideration such events as war, discoveries, public opinion, and weather as integral parts of a long-term economic life-cycle. Within a market system, Kondratiev proposed economic trends tend to generate harmonics with a periodicity of approximately 53 years. These harmonics are systemic.

Kondratiev's works were first translated into English in the early 1930's when it was discovered that he had accurately predicted not only the thirties depression, but also the speculative orgy that preceded it. During the 1930s considerable research was done on business cycle theory, culminating in Joseph Schumpeter's extensive two volume work on the subject. Later, with the advent of Keynesian simulative polices and their progressive effect on the economy, Kondratyev's ideas as well as business cycle theory slipped back into obscurity. Not until the early 1970's, when growth faltered and simulative monetary policies began to produce inflation similar to that of the 1920's, were his ideas rediscovered. Not only were Kondratyev's theories valid, but they actually predicted the course of today's economy - 60 years in advance.

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The Measurement of Change: Human affairs are rarely admitted into general discussion of economic theory. Kondratyev acknowledged public reaction as directly influential to the ebb and flow of prosperity, and therefore as vital to the economy. He viewed rational public response as tides of change, with its measurement and its effect on the future forming the basis of his Wave Theory. Kondratiev believed that people act differently over time in a continuing repetitive pattern. By combining environmental and demographic factors with the cumulative body of human knowledge, his theories refute mere historical repetition, but offer each era as unique. The Kondratyev Wave Theory consolidates seemingly random events, coherently and predictably.

Accumulation and Consumption: U.S. wholesale prices dating back to 1800 show several periods of accumulation followed by periods of over consumption. Because these periods are statistically difficult to measure our outline follows historical events, pinpointing major changes in trend. During periods of relatively cheap prices, assets accumulate. As prices increase, the consumption of assets are necessary to maintain a standard of living. When new production fails to keep up with consumption, due to relatively high prices, the economy begins to decline to another period of cheap prices, and a new growth cycle begins.

Determination of mood: A Kondratiev cycle consists of four distinct phases, or distinguishable, dramatic mood changes, the tone of which determines the actions of individuals involved in the economy. The awareness of these characteristics allows for the anticipation of the change in the economy and the psychological mood that will prevail.

The Growth Phase: A common premise among business cycle economists supposes inflation as an inevitable part of growth. Government becomes a passive participant in the inflation cycle. Growth begins from a depressed economic base and expands in an ever-increasing spiral. The interaction of the participants within the economy causes wealth, as represented by savings, and the production of capital equipment to be accumulated for the future. The expansion of production and affluence causes prices to rise, and the increased volume of goods requires a higher velocity of money, thus creating a higher price structure. Historically, the growth phase requires 25 years to complete. During this time, unemployment falls, wages and productivity rise and prices remain relatively stable. The mood of the growth phase is one of accumulation and the desire for new product manufacture. Accompanying growth is a shift in social demands. As wealth is accumulated and new innovation introduced great upheavals and displacements take place. The process of social unrest builds with growth culminating in massive shifts in the way work is defined and the role of the participants in society.

Primary Recession: Eventually, the continuation of exponential growth reaches its limits. Excess capital produces a shortage of key resources and the economy enters a period where growth creates a shortage of resources. An economy will only support expansion to the limits of its resources, both human and material. The mood of affluence also brings a change in attitude towards work. As an economy gets closer to its limits inefficiencies build up The imbalances of this period have been historically exaggerated by what can be labeled a "peak war". Examples such as War of 1812, the Civil War, World War I and Vietnam, came at the end of a very affluent period. These Wars produce strains on the economy increasing the impact of inflation. A dramatic drop in output, rapid rise in unemployment and unusually severe recession characterize this period. Although this primary recession is short lived lasting only three to five years, it is key in altering perceptions and the structure of the economy. No longer does excess create an abundance. The "Limits to Growth" now define a maximum level of economic activity that traps the economy into consolidation and tight bounds for the next 20-25 years. With the change comes a conservative shift in the popular mood reinforcing the limits.

Plateau Period: The primary recession occurs out of an imbalance forced upon the economy by real limitations. The rapid rise in prices and changes in production correct this imbalance- at least temporarily. The change in price structure, along with the mood of a population used to consumption accompanied by the vast accumulation of wealth from the past 30 years, causes the economy to enter a period of relatively flat growth and mild prosperity. Due to structural changes and the limits of the existing paradigm the economy becomes consumption oriented. Excesses of an unpopular war, along with fiscal liberalism, cause popular reaction toward stability or normalcy. A mood of isolationism permeates. The plateau period generally lasts seven to ten years and is characterized by selective industry growth, development of new ideas (both technological and social ) and a strong feelings of affluence, terminating in a feeling of euphoria. The inflated price structure from the primary recession, along with the desire for consumption, produces a rapid increase in debt. Eventually, wealth consumption expands beyond all practical limits, and economy slips into a severe and protracted depression.

Secondary Depression, or Down Grade: Excesses of the plateau period effect a collapse of the price structure. This exhaustion of accumulated wealth forces the economy into a period of sharp retrenchment. Generally, the secondary depression entails a three year collapse, followed by a 15 year deflationary work out period. The deflation can best be seen in interest rates and wages that have shown a historic alignment with the timing of the Long Wave- peaking with and bottoming at the extremes. Kondratiev viewed depressions as cleansing periods that allowed the economy to readjust from the previous excesses and begin a base for future growth. The characteristic of fulfilling the the expectations of the previous period of growth is realized within the Secondary Depression or Down Grade. This is a period of incremental innovation where technologies of the past period of growth are refined, made cheaper and more widely distributed. Incremental innovation consolidates industries.

The Down Grade sees one final period of recession before transitioning to a new period of growth. The final recession is mild with very low inflation and appears far more severe than it will be remembered for later in the Growth Cycle. Within the Down Grade is a consolidation of social values or goals. Ideas and concepts introduced in the preceding period of growth while radical sounding at the time become integrated into the fabric of society. Often these social changes are supported by shifts in technology. The period of incremental innovation provides the framework for social integration. It is important to realize the Long Wave as global. While global issues are of prime importance today with increased air travel and communication, the Long Wave defines a time table for geo political events. The Growth Period is one of political stability. Staring a the peak old alliances become challenged. Through the process of the Down Grade old alliances fail and new alliances are formed. The final stages of the Down Grade is a period of coalescing or "quickening" of the alliances that will govern the next period of growth.

Summary: Probably Kondratiev's greatest contribution to the science of investment is not his observation the world economy operates in long cycles. Cycles would suggest a repetitive nature to events. While the underlying economic conditions will repeat over time due just to the physical nature of our world, our reactions will always be tempered by knowledge and experience. The history of man has been one long climb higher. Kondratiev recognized progress as the irreversible trend. Imposed upon our progressive nature are the physical limits of life. It is the interaction of these physical limits with our dreams and aspirations that creates the constant push pull of the economy known as the Long Wave."

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"Kondratiev waves- also called Supercycles, surges, long waves or K-waves- are described as regular, sinusoidal cycles in the modern (capitalist) world economy. Averaging fifty and ranging from approximately forty to sixty years in length, the cycles consist of alternating periods between high sectoral growth and periods of slower growth. The Kondratiev wave cycle goes through four distinct phases of beneficial inflation (spring), stagflation (summer), beneficial deflation (autumn), and deflation (winter).

The phases of Kondratieff’s waves also carry with them social shifts and changes in the public mood. The first stage of expansion and growth, the “Spring” stage, encompasses a social shift in which the wealth, accumulation, and innovation that are present in this first period of the cycle create upheavals and displacements in society. The economic changes result in redefining work and the role of participants in society. In the next phase, the “Summer” stagflation, there is a mood of affluence from the previous growth stage that changes the attitude towards work in society, creating inefficiencies. After this stage comes the season of deflationary growth, or the plateau period. The popular mood changes during this period as well. It shifts toward stability, normalcy, and isolationism after the policies and economics during unpopular excesses of war. Finally, the “Winter” stage, that of severe depression, includes the integration of previous social shifts and changes into the social fabric of society, supported by the shifts in innovation and technology."

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