The Kondratiev Cycle: A 60-Year Economic Rhythm
The Kondratiev cycle, also known as the "Combo cycle," is a long-term economic cycle spanning approximately 60 years. This theory, developed by Nikolai Kondratiev, analyzes macroeconomic patterns over two centuries, suggesting predictable stages of economic development. Mastering this cycle, according to some, can lead to significant wealth accumulation.
The Stages of the Kondratiev Cycle
Kondratiev identified five distinct phases within each 60-year cycle:
- Decline: Characterized by economic stagnation, weak consumption, and general economic unease.
- Reinvestment: A period where wealthy individuals begin reinvesting capital and new technologies emerge as crucial drivers.
- Prosperity: Marked by rapid economic growth and widespread optimism.
- Over-Construction: Excessive investment and speculation lead to increased risk, rising stock prices, and inflated commodity values.
- Chaos: Financial speculation dominates, bubbles form, and asset prices become unsustainable, culminating in a financial crisis and a return to decline.
The end of the chaotic period signifies the beginning of the decline phase, thus starting the cycle anew. This cyclical model has been compared to a simplified model of the American real estate market.
The United States in the 20th Century: An Example of the Cycle
The early 20th century in the United States exemplifies the reinvestment phase. From 1920 onwards, technological innovation boomed, with the introduction of automobiles, washing machines, and electric vehicles. This created new jobs and fueled consumer demand, fostering a positive feedback loop where capital investment led to technological advancements, increased employment, and heightened consumption. This era, fueled by the electronic revolution, is considered a golden age of economic growth and prosperity for the United States.
The end of World War II saw the U.S. implement ambitious plans, supported by substantial wealth. However, the prosperity eventually waned in the 1970s. Technological progress slowed, and production efficiency declined, leading to a recession. Attempts to stimulate the economy through quantitative easing resulted in high inflation, with the Consumer Price Index (CPI) reaching peak levels. The stock market experienced multiple declines, leading to bankruptcies and a period of economic hardship often referred to as the "confused generation".
The reintroduction of new energy into asset prices through the first wave of Internet technology in 1986 pushed the cycle forward and brought the U.S. to the next wave of growth.
Japan's Experience: Resisting the Cycle
Japan, after World War II, experienced resurgence due to international circumstances, with GDP growth in the 1960s and 1970s. This led to widespread ownership of cars, appliances, and air conditioning, which delayed the inevitable shift in the cycle. Japan became the second largest capitalist country but later experienced over-reporting of capital, which was beginning to warm up the investment climate domestically. From 1985-1989, Japan then hit the peak of its economic activity. From the start of the war in 1945 to the peak, Japan went through 10 years of recover, 10 years of prosperity, 15 years of construction, and 5 years of chaos.
Instead of letting the economy recover, the Bank of Japan tried to manipulate and avoid the cycle, leading to a death cycle. Even with the explosion of internet technology, the trend was not followed. Japan lost 30 years, as well as the entry ticket for the internet revolution.
China's Current Position in the Cycle
It is argued that strong industrial manufacturing has kept China from the growth cycle, but it can only delay, not prevent. From 1982 to 1990 was the warm up investment period, while 1991 to 2005 was the crisis period. The years from 2005-2018 was a transition period. During the 2008 financial crisis, the potential of the technology explosion was still sufficient. From 2018 to 2025, we see the turn from chaos to decline. Since 2018, internal debt has increased, which started the performance of the debt. In 2021, China's economic and financial data were ruined, there was no expected consumption, and the numbers in financing, exports, and investments were declining. Currently, the US and Chinese markets are saturated and inevitable funds caused a breakthrough in inflation.
The prediction is that the dollar will begin to rise in 2022, which could lead to long term decline. The prediction was set to occur around 2025, but now it may come a little early. Because of the length of time, this will likely be a longer and painful period.
Implications for Individuals
The understanding of the Kondratiev cycle can be beneficial in investment decisions. Each person has a limited number of chances to benefit from these cycles in their lifetime. Those born between 1975 and 1985, buying a home was considered as successful wealth and freedom today. However, it is not the best solution for people from 1985 to 1995, because the essence of buying a house is to add leverage. Now the prices are high, so it is not beneficial to add a five-fold leverage.
For those who were born after 1985, their first important time will be around 2025, during and after the holiday period. At that time, people will be able to buy at a value as the price goes down. Those with debt and leverage will feel that life is hard, but those with stable cash flow can live.
Ultimately, one should understand the trend and adapt to the situation.
Conclusion
The Kondratiev cycle is an objective phenomenon that is not dictated by human will, but a result of international asset price fluctuations and new technology applications. To go even deeper, the economic cycle is actually a human history.