Kondratieff Wave

The K Wave or the Long Wave

In 1926, Nickolai Kondratieff (1892-1938) a Russian economist released a work called “Long Waves in Economic Life”. The major premise of his work was that modern capitalist economies have a cycle of boom to bust with a period of around 54 years.

The jubilee cycle dates back to the days of the Old Testament when the economy was primarily agricultural based. A jubilee year occurred every 50 years when all slaves were freed and all land reverted back to the original family owners or custodians. The land was leased rather than sold and the lease cost was determined by how many years until the jubilee occurred.

Under the jubilee system, the land was valued by how much food it could produce, which was fairly easy to assess. The land was left fallow in the Sabbath year, every seventh year and the produce was free to all during that year. The Mayan Indians also recorded a similar 50 year cycle, as did the Ancient Egyptians and the Romans. It’s not coincidence that 50 years is roughly equal to two average generations of man.

Kondratieff concentrated on the period 1789-1926 measuring economic activity in terms of interest rates and prices. He concluded that the economic cycle consists of four distinct periods. The first period is an inflationary growth phase, followed by a second phase of stagflation. The third phase brings deflation associated with another phase of growth and finally the depression phase, which is the fourth phase. Considering Kondratieff postulated his theory in the 1920’s on the eve of the great depression, it was quite remarkable insight. It’s therefore astounding that Stalin sent him to prison for the rest of his days.

Spring Inflationary Phase

The initial phase of the cycle is characterized by stable or slowly rising prices, low commodity prices, low interest rates and rising stock prices. Along with this expansive growth company profits also rise in this period and investment in technology increases.

Summer Stagflation 

The Recession phaseInflation inevitably leads to stagflation which is generally represented by rising prices, rising commodity prices and rising interest rates along with stagnant or correcting stock prices. The corporate sector should also report stagnant profits and rising debt during this period. War is often a consequence of this phase, which contributes to the rising debt as business resources get diverted.  A war during this phase is referred to as a peak war.

Kondratieff noted that trough wars occur at a time when the economy stands to benefit from the economic stimulation caused by war. Peak wars usually occur when recovery is already underway and these wars are usually funded by government, which tends to inflate the money supply.

Autumn Deflation

Economies tend to plateau in the next phase. Prices fall or go sideways including commodity prices. Interest rates fall and stock prices rise sharply. Corporate profits grow during this phase, but not as markedly as during the inflation phase. Debt also rises quite sharply and speculation is likely to increase. It can be a time of substantial technological innovation.

Winter Depression

Stock market collapse and debt collapse are sure signs of depression, but they are also accompanied by falling prices, rising commodity prices (especially gold), stable or low interest rates and falling profits. Stock market collapses usually give rise to numerous scandals. A major war is likely to occur during the trough and that should help contribute to the end of the depression phase and the start of the new expansion period.

The K wave, as it is often called, can be tracked over the US economy extremely clearly since the 1780’s. The last two cycles, when examined more closely, help us pin point where we are or might be in the current cycle.

1896-1907 Expansion phase
1907-1920 Stagnation and a peak war WWI
1920-1929 Roaring 20’s and deflation
1929-1949 Depression and a trough war WWII

1949-1970 Expansion phase
1970-1983 Stagnation and the Vietnam War, peak war
1983-2000 Deflation and globalization
2000-2003 War on Terror, a trough war

So where does that leave us at the time of writing in 2005? Are we still in the winter of the K wave, the depression phase of the market or are we at the beginning of a new expansion phase, the K-wave spring.

One of the more intriguing aspects of a K-wave winter is the build-up of rather sinister forces that are religious in nature. In the 1930's the rise of Nazism led to WW2. In a prior K-wave winter, during last quarter of the 19th century we saw the rise of the Klu Klux Klan as a backlash to the South losing the Civil War. Once again we’re seeing the rise of religious fervour, both in the US and the Middle East.

One of the greatest contributions Kondratieff made to economic thinking was the growth and change concept. He postulated the inevitability of progress, the irreversible trend of economic growth, like population growth, continuing unabated. The awareness of a K wave should assist us when dealing with the tricky period of the K wave winter. People and societies do learn and change. So while the cycle does exists still, its effects can be somewhat mitigated with sensible actions. We don’t have to repeat the mistakes of the past to the same degree as in the past. It’s unlikely that the world will ever see the same sort of depression as recorded during the 1930’s.

In Australia our stock market benefits from resource booms. We saw one during the 1970’s and we’re seeing another in the early years of the new millennium. Is this still the K-wave winter? The spring of the new cycle is generally signalled when the US stock market moves to new all time highs and that generally comes after a collapse in commodity prices, which in turn will signal the end of the mining boom.

 The Kondratieff Wave
Fig 124