One of the most fascinating areas of interest in economics has been that introduced by Russian Nikolai Kondratiev whose analysis points to a 60 year economic cycle going through 4 phases. Spring, Summer, Autumn and now the Winter phase which we are going through the 2nd part of the Winter phase (the 1st being recession, the second being depression). This final part of the 60 year Kondratieff wave will last a further 10 years and 2013 marks this point.

Below is an explanation from Christopher Quigley along with a chart that applies to the US to best illustrate the current and previous waves:

There are very few heroes in economics but for me one of the patron saints of that profession should be Nikolai Kondratiev who was shot by firing squad on the orders of Stalin in 1938. He died for what he believed was the truth. His execution was ordered because his academic work propounded that the capitalist system would not collapse as a result of the great depression of 1929. This truth Stalin did not want to hear, thus Nikolai was exterminated and his work suppressed for over two decades.

Kondratiev’s analysis described how international capitalism had gone through many such “great depressions” and as such were a normal part of the international mercantile credit system. The long term business cycles that he identified through meticulous research are now called “Kondratieff” cycles or “K” waves.

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.

Implications for 2012 and Beyond

Based on Professor Thompson’s analysis long K cycles have nearly a thousand years of supporting evidence. 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.

Like all cycles, K wave analysis is more “descriptive than prescriptive”, but provides enormous insight into our current economic condition. This it would be wise for our political and economic leaders to accept the lessons of history and realize that based on comprehensive economic evidence, following the 2007 systemic collapse of world banking and credit, things are likely to get much worse before they get better. Such evidence also supports the proposition that the USFED and the EUROECB instead of prolonging the agony through 5 trillion of credit expansion should liberate the “international market” and let it intelligently and efficiently do what it has done 18 times before. World bankers if they were properly versed in their craft would realize that Kondratiev’s heroism has given them the understanding they require to correctly comprehend and deal with the crisis. However, instead of seeing “it” as an acceptable development based on the natural result of technological stagnation they have panicked and mis-diagnosed it as a credit/monetary problem. Thus the epiphany of truth will only finally dawn when the both the FED and the ECB go bust and as every financial dog on Wall Street knows, this is not a matter of “if” but “when”.

The good news is that after this creative destruction period is over the world economy will be ready for a new epoch making spring boom which will propel it to new levels of political, social and economic development. Hopefully enough reasoned minds will prevail to prevent the only catastrophe that will completely destroy this paradigm blossoming into fruition and that prospect I do not even wish to contemplate or enunciate as I desire to end this brief article on a resoundingly positive note.