Riding the Kondratieff Wave

Despite my general optimism and usually sunny disposition (a Labrador retriever with a pen, if you will), I’m a sucker for depressing economic forecasts. Maybe my fascination with gloom comes from hearing stories about the Depression from my parents and grandparents when I was a child. Or maybe it’s my hunch that economic pessimists know something the optimists don’t.
Whatever the reason, I’ve always had the feeling that I’d one day see the economic equivalent of the California Big One. So when I discovered the theories of Nikolai Kondratieff many years ago, I was convinced the long-dead, gloomy Russian economist was on to something. Let me explain why Nikolai may provide the best explanation yet for what’s going on in the economy and on Wall Street right now.
In 1926, after developing the Soviet Union’s first five-year plan, Professor Kondratieff published a report entitled “Long Waves in Economic Life.” He theorized that capitalist societies displayed long waves of boom and bust lasting about 50 to 60 years, and predicted the Great Depression — as well as the eventual recovery and expansion of the capitalist West. For that, and for criticizing Stalin’s collectivist agricultural policies, Kondratieff was shipped off to a Siberian gulag, where he was sentenced to death in 1938.
Kondratieff’s theory, which last received attention during the inflation of the 1970s, holds that the economy goes through four phases. First, there’s an inflationary growth phase lasting about 25 years in which growth begins from a depressed base and expands in an ever-increasing spiral.
After prices rise and growth reaches its limits, there is usually a war (the War of 1812, the Civil War, World War I and Vietnam were post-growth wars) and economy drops into a three- to five-year recession. This is followed by 20 to 25 years of slower growth and more conservative political attitudes.
Next comes an “autumn” period of seven to 10 years of flat growth and mild prosperity, although there is a general feeling of affluence marked by an orientation toward consumption, like the Roaring ’20s.
Finally, the excesses of the autumn plateau lead to “winter” — an exhaustion of accumulated wealth that forces the economy into a sharp pullback. Kondratieff saw this as a three-year collapse followed by 15 years of deflation and quiet innovation. Winter ends with a final recession before growth starts anew.
Kondratieff’s winter sounds a lot like November 2008. Let’s hope it’s not, but many of the signs — overextension of credit, exhaustion of demand, worldwide decline in economic activity — are staring us in the face.
Most economists view Kondratieff as a crackpot. And even those who support a cyclical view of human behavior often believe his clocklike precision is mechanistic.
Being the gloomster I am, though, I think Kondratieff was pretty clever. If we indeed are entering “winter,” I’d rather have him as my guide than some guru predicting a Dow of 20,000.

Evan Cooper is deputy editor of InvestmentNews.