Reviews and Views

Kondratieff Winter (Economic Depression)

In an article by Tim W. Wood titled “Warning II!” dated June 19, 2009, he makes the point that there is no logical reason to see the economy in an optimistic view.  Wishing that the worst is behind us is in his opinion just a false optimism that will eventually cost the average investor dearly.  Their greed will keep them in the stock market trying to gain back their losses.

Mr. Wood believes that we are in the midst of a Kondratieff Winter.  Probably most of us are not that familiar with K-wave theory.  The following explanation comes from the website (http://www.kondratieffwinter.com/kw_wave.html).

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.  The of phases that are likened to the seasons:

• Spring – inflationary growth phase, which sees the expansion of production, affluence, falling unemployment, rising wages and so on.  This growth phase lasts about 25 years.
• Summer – recession.  Growth reaches the limits of resources.  There’s a drop in production, a rapid rise in unemployment and a back-lash against an economy of abundance.  This phase last 3-5 years.
• Autumn – deflationary growth, selective industry production, innovation, rapid increase in debt as society orientates itself towards consumption.  This phase can last 7-10 years.

• Winter – depression, the economy contracts sharply, there’s an exhaustion of accumulated wealth.  Kondratieff viewed this phase as a time of cleansing when the economy can recover from times of excess and lay the foundation for future growth.  He considered this phase would be characterized by a 3-year collapse followed by 15 years of deflation and quiet innovation.  This is the phase that Wood believes that we are in now.

Personally, allow me to recommend an excellent book written by William Strauss and Neil Howe, “The Fourth Turning”. These authors show how history occurs in cycles.  According to Strauss and Howe, we have entered into the 4th turning or crisis cycle of history which lasts for about 20 to 25 years.  Notice that the 3-year collapse followed by 15 years of deflation is close to their 20-year cycle.  Interesting.

Bill Wyler

June 24, 2009 - Posted by Bill Wyler | Economy