Wednesday, April 8, 2009

The Long Wave Has A Long Life

There's a conference going up in Toronto that has certainly attracted the doom and gloom set. Larry Summers' former partner Nouriel Roubini is there as is Merdith Whitney, but what caught my eye was the sponsor of "A Night with the Bears", Ian Gordon.

Gordon, author of The Long Wave Analyst newsletter, expects the Dow Jones industrial average to plummet to 1,000 based on Kondratieff Long Wave Theory. According to Kondratieff Theory repeat every 60 years or so.

Murray Rothbard tried to bury the theory more than 15 years ago:

There is no "Kondratieff cycle," no way, no how. There is among many people, even including some of the better hard-money investment newsletter writers, an inexplicable devotion to the idea of an inevitable 54-year "Kondratieff cycle" of expansion and contraction. It is universally agreed that the last Kondratieff trough was in 1940. Since 51 years have elapsed since that trough, and we are still waiting for the peak, it should be starkly clear that such a cycle does not exist.

Most Kondratieffists confidently predicted that the peak would occur in 1974, precisely 54 years after the previous peak, generally accepted as being in 1920. Their joy at the 1974 recession, however, turned sour at the quick recovery. Then they tried to salvage the theory by analogy to the alleged "plateau" of the 1920s, so that the visible peak, or contraction, would occur nine or ten years after the peak, as 1929 succeeded 1920.

The Kondratieffists there fell back on 1984 as the preferred date of the beginning of the deep contraction. Nothing happened, of course; and, now, seven years later, we are in the last gasp of the Kondratieff doctrine. If the current recession does not, as we have maintained, turn into a deep deflationary spiral, and the recession ends, there will simply be no time left for any plausible cycle of anything approaching 54 years. The Kondratieffist practitioners will, of course, never give up, any more than other seers and crystal-ball gazers; but presumably, their market will at last be over.
Bad theories don't seem to die in economics, they just seem to grab new followers. I'm beginning to think there is a mass of people in every generation that just don't think logically.

1 comment:

  1. As a Wave Theorist of Wave Theorists, allow me to point out an article from the WSJ, October 12, 1979, "After the Fall: 50th Anniversary of Great Depression is Sparking New Interest in the "Kondratyev Wave":

    "Kondratyev disciples contend that after the Civil War peak, a supercycle pattern developed remarkably similar to the pattern after the War of 1812 - a brief primary recession, a plateau until 1874, a long secondary slump until 1896, and finally a period of renewed prosperity and rising prices until 1920."

    Later on comes an analysis of the then "Current Situation":

    "Some forecasters even suggest that if a secondary slump does soon develop, it may be marked, like the current plateau period, by continuing inflation."

    Now the Supply Siders - the Good Guys - like Paul Craig Roberts, reported that when Reagan became President, RR's team worked out an agreement with the Fed (Volker) that there would be a reduction in the increase of the Money Supple over a 3 year period. The Fed provided that reduction over a period of months, thus guaranteeing the deep recession of the early 80s.

    Our critic of the Kondratyev Cycle conveniently points to the year 1984 - "The Kondratieffists there fell back on 1984 as the preferred date of the beginning of the deep contraction." - and this is misleading at best.

    The 1979 WSJ article finds the K-Wavists wondering where the Secondary Slump will occur and - LO! - here is a near Depression in 1982! Far, far from refuting the K-Cycle, the K-Wave is verified in the eyes of the K-Wavists!

    "Ordinarily, a down phase in the long wave is a time of deflation," says Mr. Forrester of M.I.T. "However, it's certainly possible that the next time around, we may witness all the physical aspects of a depression - rising unemployment, falling production and so on - and yet have rising prices. I don't rule out an inflationary depression at all."

    The question - and it's ALWAYS the next question when you correlate a Mathematic Calculus to any given Current Reality - is "Are we NOW in the Next Time or Iteration?"

    Sometimes, you get more than you bargain for. "From Judaea shall come a World Ruler..." sez the Star Prophecy. Who knew it would be Vespasian and the Flavians? Who knew the prophecy would trump Galba's?

    Conservative Economic Theory seems to be currently built on two general themes, from Jude Wanniski on the Supply Side to Schwartz and Friedman on the Demand Side. These two themes are empirical in nature and our esteemed site host knows where Schwartz and Friedman went wrong. So we progress.

    The K-Wavists are not refuted - yet. "1984" is "mere appearance". We have not yet achieved a Slide Show of the Noumenal World and that's just fine.

    Let's get back to an honest streamlining (Note the Weasel words) of the Supply Side and a very moderated growth of the Money Supply - Friedman stated a computer could do the job - and get back on track to work towards the transcendent society that we have several times managed to quash.

    "Yeah, right!"