Nicolai Kondratieff was a Russian agriculture economist who, while working on a five-year plan for the development of Soviet agriculture, published his paper, “Long Economic Cycles,” in 1925. He outlined what later became known as “Kondratieff Waves.”
Kondratieff Waves were observations of a series of super cycles, long surges, “K-Waves” or long economic cycles of alternating booms and depressions or of periods of strong growth offset by periods of slow growth in capitalist societies. These waves or cycles were, at the time, calculated to last from 50 to 60 years, or roughly a human lifetime in those days.
Kondratieff applied his theories to capitalist societies, most notably to the United States from the time of the American Revolution. His undoing came in 1928 when he published his “Study of Business Activity in the Soviet Union” that came to much the same cycle conclusions for the Soviet economy that he had noted for capitalist societies.
Josef Stalin saw Kondratieff’s latest work as criticism. Kondratieff was arrested and, following a series of trials, he was banished to the Gulag, where he died in 1938. Since 1925, there has been further research on the subject. His thesis attracted many adherents who formulated their own explanations for the rhythms: Rostow, Volland, Borchert, Shumpeter, Mensch, Mandel and Trotsky among them.
Here, we will compare long-term charts with the principles presented by Kondratieff in his original paper and interpret current conditions to establish where we stand in the currently active K-Wave cycle.
When Kondratieff formulated his findings, mainstream economic thought was that the economy existed in a state of general equilibrium, meaning that the economy naturally consumes whatever it produces because the needs of consumers are always greater than the capacity of the economy to satisfy those needs.
Government intervention was not present during Kondratieff’s time. After his death, governments began to control economic cycles through active fiscal policies and through regulation of interest rates, mainly derived from Keynesian economics. The reflexive effect generated by government intervention of economic cycles is best described by Julian Snyder: Historical studies show that money printing can postpone recessions and depressions, but it has never turned a major economic cycle.
Therefore, to identify where we may be in the cycle today, we have to look at the descriptive data, rather than the period in years, which can be misleading. Now cycles constantly face intervention by governments resulting in a disruption of the long-term wave’s natural rhythm. Even with the enlargement of the wave, the core forces of capitalism are working in the background. The diagnostic will be evident by studying the convergence of factors, such as the behavior of interest rates, gold prices, stock prices and the psychological mood of the public.
Kondratieff studies going back to Napoleonic wars show a strong relationship between economic conditions and secular trends on interest rates. This may be a vital component of the K-Wave and, therefore, a good starting point for reading the cycle.
The U. S. government bond yield for the 10-year notes is used to read the yield required by investors to loan funds to the government, and it reflects inflation expectations. The chart going back 100 years shows the last low in yields back in 1941 (see “Long-term rate trends,” below). Then, the 40-year upswing from 1941-1981 set in, followed by a 31-year downswing from 1981 to today, the new low. From the chart, we can infer that fiscal policies and interest rates regulation have enlarged the cycle to 71 years.
The last time the government implemented strategies to increase interest rates was during the last peak of the debt-to-Gross Domestic Product (GDP) ratio back in 1940s (see “Debt flow,” below). This period coincides with the beginning of the last upswing of the K-Wave. The long cycle seems to be reflected in the debt-to-GDP ratio, as a curve that is inversely correlated to the interest rates historical chart. Let’s not forget that at the current time, the Federal Reserve is shifting its policies on interest rates again, after a period of quantitative easing. This also is in line with the K-Wave principle.