The Kondratieff Wave

The Kondratieff Wave is an economic theory that states that Western capitalist economies are susceptible to extreme performance volatility as they expand and contract over the years. Unlike what is referred to as the business cycle, the Kondratieff Wave holds that these fluctuations are in fact part of a much longer cycle periods known as “super cycles” that last between 50-60 years or longer depending upon factors such as technology, life expectancy, etc. and thus must be examined over their entirety to be best understood. 

It is our strong belief that today’s economist and market pundits are far too short-sighted in their approach in that their analysis is derived principally from recent segments of these super cycles and fails to recognize the hidden suspended tension accruing underneath that could unwind in a vicious manner as history has shown time and again. 

The primary catalyst could be a single extraneous shock or the arrival of an inflection point that accumulated excesses are no longer able to be contained. Fresh signs of such excesses are now evident each passing week as the escalation of debt in the public and private sectors reveals the systemic weakness across many of the major credit market segments- mortgage backed securities, asset backed commercial paper, leveraged loans, and others. The contagion is approaching such a point that now more than ever we must come to understand the nature of these super cycles so we can mitigate the fallout of a mighty nuclear Kondratieff Winter. To proceed otherwise would render history unable to repeat itself.

The articles below each contribute a special component to the nature of the Kondratieff Wave theory.

1. The Kondratieff Theory - A simplistic yet informative narrative on the man, the four stages of the cycle, and its evolution in modern times. It blends political, cultural and other esoteric mitigating factors with cyclic charts and historical references to define the theory in practical terms. 
   
   

2. MUST READ Perhaps the best compilation of material on the net on the Kondratieff wave can be found at www.thelongwaveanalyst.ca. The site is run by Ian Gordon, a leading proponent of the Kondratieff Wave. Of special interest is the recent newsletter special edition of the Longwave Analyst published in November of 2007 that provides a marvelous overview of the Kondratieff Wave history, features and prospects in our turbulent times. A must read!
   
   

3. MUST READ Smith, Marx, Kondratieff and Keynes: Their Intellectual Life Spans, the Convergence of their Theories based upon the Long Wave Hypothesis and the Internet - The treatise below from Matthias Wenchieh was posted on www.southernbanking.com and is very fitting for our long wave discussion. The author here frames the relationship between economic consumption and production within the framework of the four primary schools of thought over modern capitalism. He found that the “invisible hand” proffered by Adam Smith in 1776 assumed this interaction to be too harmonious and saw that Karl Marx’s notion of production and consumption too conflicted. He concluded that the Keynesian theory of fiscal and monetary policy as too radical and destabilizing to remedy the excesses between production and consumption over time. While these models do account for the labor theory of value, their methodology is flawed because they ignore the cycle dynamics evident in modern capitalism and fail to place a premium on labor innovation.
   
   He supports the Kondratieff long wave theory as the best one that can reconcile these excesses over time through an internal rebalancing occurring during periodic Depressions that serves to initiate subsequent upturns. He concludes that the information-knowledge revolution over the internet is finishing off the Keynesian model once and for all. This paper does a superb job of showcasing the various labor innovations over time that have marked past uptrend cycles such as the cotton gin, railroads, electricity and that under the Keynsian model war and deficit related spending have usurped labor innovation as the primary catalyst forces. We can at least take some satisfaction that the onset of the next catalyst is already upon us- the internet’s knowledge-based information revolution.
   
   

4. MUST READ Footprints of the Future - The expose below is a study of the use of timelines to help determine long range forecasts. It was authored by Peter von Stackelberg with the futurist consulting firm Social Technologies. More of their work can be found at www.socialtechnologies.com.
   
   Von Stackelberg’s piece asserts that by laying cycles, waves, logistics curves,
   and other archetypal patterns over historical data, we can better understand
   the dynamics of social, political, and technological change that will shape our
   future. His premise that complex systems exhibit cyclical behavior correlates 
   nicely with our Kondratieff Wave theme. In one section he integrates the K-Wave
   to complement his timeline data to reveal some interesting correlations regarding
   the K-Wave and petroleum production since 1960. It suggests that the energy 
   cycle consistently appears to lead the K-Wave over time.
   
   He also explores the temporal and causal relationships between the K-Wave
   and historical events and distinguishes between traditional and exploratory forecasts. I found this material to be very helpful in relating the Kondratieff Wave to a more  practical approach to long range economic forecasting and thus is very relevant content for our readers.
   
   

5. The Theroxylander in Flame - Here represents another version of the Kondratieff Wave with an emphasis on examining the expansion of debt over the entire cycle. Its appeal is in its simplistic yet effective approach in showing that its really all about one giant cycle of credit that incubates and grows to unsustainable proportions before bursting. The linear timeline begins with an inflationary cycle that transitions into a mighty deflationary bust. Please note the chart relating household mortgage as a % of GDP. It reveals the absurd levels we are just now beginning to unwind and asserts that some $4-6 trillion in mortgage debt may end up in default. That may prove to be a bit ambitious but nonetheless this approach does expose leveraged debt to be the debilitating force now exposed for all to see.  (Posted September 29, 2008)
   
   

6. First Snowfall of Kondratieff Winter - This recent piece from www.runtogold.com captures the urgency of the events now unfolding. It offers convincing evidence through T-Bill charts and supporting analysis that the onset of negative T-Bill rates spells  trouble ahead. It also offers direct statements from titans of finance that at first blush may seem shocking for their candor and surety. Paul Volker call this "the mother of all crises" while George Soros decries the end of a 60 year credit expansion. A brief video on Ron Paul's debate performance is included also. Please visit www.runtogold.com for more.
   
   

7. Executedtoday.com: Nikolai Kondratiev - I decided to add this brief piece on Kondratieff to provide more color on the man himself. The site www.executedtoday.com profiles notable people who have been executed over the course of history. Kondratieff’s execution reminds us that often brilliance and genius is met with harsh treatment of those who cannot accept them on their terms. Such was indeed the case with NK, for he was forced to endure the hardships of the Russian gulag for eight years before his untimely death as a direct result of Stalin’s infamous purges. Fortunately, his work has endured and is as relevant today as ever before.
   
   

8. What Kondratieff Said - This is a wonderful compilation of specific portions of various articles and books over the years relating to the words and writings of Nikolai Kondratieff on a wide range of material on the impact of some components of his theory such as commodity price movements, technology transitions, the infrastructure life cycle, capital lifespan theories, innovation waves, and much more. His acumen for the nuances of the science of economics is on display in a wide range of areas relating to his theory. Other unique material on him is included there at www.datacomm.ch/dbesomi/Links/links-16.html.