Nikolai Kondratieff born 1892 executed 1938

This article is about Nikolai Dmyitriyevich Kondratieff a Russian economist and whose work of more than 80 years ago is once again being examined today. Before the American stock market crash in 1929 he predicted that it was inevitable that capitalist economies went through a boom to bust cycle that would constantly repeat itself in the long term over a period of 60 – 80 years.

In the present economic climate many are returning to and re-examining the Kondratieff Wave Theory.

Stalin did not like Kondratieff’s assertion that capitalism would always revive after a “Downwave”. Stalin preferred to believe the Karl Marx’s prediction that capitalism would itself produce many internal tensions which would ultimately lead to its destruction. Stalin therefore did not like Kondratieff’s work and sent him to hard labour in the Gulag for 11 years before having him executed in 1938.

Stalin liked the downward wave that Kondratieff predicted but Stalin did not like his prediction that it was a long term cycle and that capitalism would in time, again prosper.

The central concept of the theory holds that major capitalist economies tend to grow, boom, bust and grow again in long waves or ‘supercycles’ that last between 60-80 years. In each long wave, according to Kondratieff’s theory, capitalist economies pass through distinct and measurable stages of growth, plateau, contraction and then eventually a renewal. These changes are closely related to periods of intense technological innovation.

Kondratieff maintained that capitalism reinvigorates itself after a crisis after studying capitalist economies going back to the 16th century. He focussed on prices, interest rates, and output data. His work was published as “Long Waves in Economic Life” in 1926. Unfortunately for him he concluded that capitalism never destroys itself completely but renews and reinvigorates itself.

A single Kondratieff Wave is one big credit cycle. It starts with very low outstanding credit levels, then the credit grows and the 60-80 year cycle ends with totally absurd credit levels and then everything collapses with massive defaults.

The length of the Kondratieff wave is related to the length of human life. Each cycle repeats the mistakes man made in the previous full cycle. None of us remember the 20’s before the great crash but the housing bubble back then was cheered and celebrated in the same way as it was celebrated here a few months ago. That is why those times were called the roaring twenties. Interest rates and prices did not bottom until 1949.

Kondratieff suggests there are four periods within the full long wave and he likened them to the seasons. Each period takes many, many years.

The Spring period starts after the devastation of the Winter in the previous cycle. In the Spring period debt level is low, consumption is low and well below incomes – people save. The amount of debt expands moderately and is easily serviced as this is a period of low inflation.

The Summer period has more growth and expansion but much higher inflation. Interest rates rise and mortgage rates go as high as 17%. Servicing the debt becomes more difficult. Apart from the high interest rates everyone felt good and this feeling of well being lasts for years and years.

Autumn feels good as it starts. It was the time of the I–generation. Everyone wanted everything and the I-generation bought I-Pods, I-Phones, I-everything. I want a BMW, I want a Porsche, I want a Porsche with a personalised number plate. They got them all – but on credit.

Debt and the economy work together as each feeds off the other.

More debt was used to finance speculation in shares. The banks created special schemes called “derivatives” and all kinds of other fancy instruments to lend money. During the Autumn period banks encouraged their customers to invest in the “buy to let property market” and created even more schemes where property buyers were encouraged to take out “interest only” mortgage schemes – no need to pay back the capital as the value of the house is going up all the time.

As the property and share assets bought with loans apparently rose in value – this notional extra value was used as collateral for even more loans.

At the end of the Autumn period the prices of stocks and shares and property grew almost exponentially - but so did the debt. As long as the value of the assets kept going up, the debt was sustainable.

However when the share and property prices fell at the end of Autumn period the pledged collateral could no longer support the debt and the whole bubble began to unwind. It happened very slowly at first but it soon gathered speed and before we knew it – Autumn had passed the season had changed to Winter. We are in the period Kondratieff called Winter now.

When Winter comes all the excesses must end. People can’t go on taking out another credit card to pay the interest on the four they have already filled up. At this time the collateral that was used to back up the debt is falling in price, banks call in loans, the merry go round slows down and when the music stops there are not enough chairs. Modern day economists call this the Minsky Moment (the phrase was coined in 1998 by Paul McCulley of Pacific Investment Management).

There are now going to be further massive defaults and bankruptcies. The Winter period of the Kondratieff wave has to happen just as Winter always follows Autumn in the nature. Banks will fail. Factories will close. Governments will fall. Trading agreements will be breached as Countries adopt a protectionist stance and try to look after themselves. This will happen worldwide.

The only good news is that Kondratieff also forecast the recovery and of course that is why Stalin had him executed.

The economy self-heals itself during the Winter period as all the bad debt is eliminated. It is a very painful long process – it is only beginning to happen here.

All this theorising about the World’s economy may be a bit depressing but whenever I feel a bit down I always turn to my music. As the composer Virgil Thomson said, “Whatever deceptions life may have in store for you, music itself is not going to let you down.”

So I think of Jerry Lee Lewis singing the Kris Krisofferson song:

“ See him wasted on the sidewalk in his jacket and his Jeans
Wearing yesterday’s misfortunes like a smile
Once he had a fortune full of money
And he spent it like it was going out of style”

Or going even further back in time to a Jules Styne number:

“ The party’s over
It’s time to call it a day
They’ve burst your pretty balloon
And taken the moon away
It’s time to wind up the masquerade
Just make your mind up the piper must be paid”

Fortunately Kondratieff forecast that the period he called Spring inevitably follows Winter and that signifies the start of the next full Kondratieff Wave when a nation of spenders is converted into nation of savers, which can again export more than it imports, which can again produces more than it consumes and which can save more than it spends.

Another tune I like is by the late Moon Mullican who sang, “Good Times Are Gonna Roll Again Troubles On The Run” – it will as soon as the Kondratieff Spring arrives. Meantime we have to endure the Kondratieff Winter he so rightly forecast 82 years ago.

I think that in time Kondatieff will be recognised as a genius in his field and his work of 1920’s will still be studied for centuries to come as the cycles he forecast continue and history repeats the same mistakes Kondratieff Wave after Kondratieff Wave.