Saturday, June 27, 2009

The Myth of the K Wave

I didn't realize that the Kondratieff Wave has a new spiffed up 21st century name, the K Wave. Gary North points this out in a column at LRC.

The Kondratieff Wave has even more lives than Keynesianism but, like Keynesianism, even when facts move in a different direction then the theories predict, the theories march on. As North notes:

Maybe you have not heard of the Kondratieff wave. But if your favorite investment guru is structuring his recommendations in terms of the Kondratieff wave, you are in big trouble if you have followed his advice.

The Kondratieff wave is a supposed macroeconomic force that creates a 54-year cycle of boom and bust. There is no explanation for it. The man who discovered it, or thought he had, said that there was no theory to explain it...

The K-Wave is supposedly going to bring a deflationary collapse Real Soon Now. The Western world's debt structure will disappear in a wave of defaults. Kondratieff's 54-year cycle is almost upon us.


The last deflationary period ended in 1933. This became clear no later than 1940. World War II orders from Great Britain, funded by American loans and Federal Reserve policy, ended the Great Depression by lowering real wages.

In 1942, price and wage controls were imposed by Washington, the FED began pumping out new money, ration stamps replaced the free market, the black market overcame shortages, and the inflationary era began. That was a long time ago. But the K-Wave is heralded as a 50 to 60-year cycle, or even more specifically, a 54-year cycle. That's the entire cycle, trough to trough or peak to peak.

The K-Wave supposedly should have bottomed in 1933, risen for 27 years (1960), declined in economic contraction until 1987, and boomed thereafter. The peak should therefore be in 2014.

There is a problem here: the cyclical decline from 1960 to 1987. It never materialized. Prices kept rising, escalating with a vengeance after 1968, then slowing somewhat – just in time for the longest stock market boom in American history: 1982–2000.

OK, say the K-Wavers: let's extend the cycle to 60 years. Fine. Let's do just that. Boom, 1932–62; bust, 1963–93; boom, 1994–2024. Does this correspond to anything that happened in American economic history since 1932? No...

There is always a market for bearish stock market scenarios. It doesn't matter what theory is offered. There are believers who love the conclusion but who don't have the ability to explain the particular chart, theory, or logic behind the forecast.

Here is an oddity. In 35 years, I have never seen a bullish stock market forecast based on the Kondratieff wave. Yet half of the time a cycle is in the upswing. Why isn't there someone out there who made his subscribers a lot of money by using the Kondratieff wave to forecast the peak (sell short) and the trough (go long)? Why is it that the cycle's peak is always immediately behind us? Why is it that we are never in the trough?

There is much more in North's article which can be read here. One note. North is a bit tough on Julian Snyder. North writes:

Julian Snyder was the most visible of these newsletter editors. His International Moneyline ($282/year – $560 in today's money) began predicting this cyclical decline sometime around 1976. He even went so far as to pay for a translation of Kondratieff's Russian language articles, which he published as The Long Wave (1984). In 1989, Richard Russell took over the unexpired subscriptions for International Moneyline.
It should be noted that Snyder also was instrumental in getting Murray Rothbard to write The Mystery of Banking. Probably the best book going as far as an explanation of how the Fed creates money. Snyder actually came up with the title and published the book.


  1. Wenzel,

    Mish likes K Wave stuff. And I have read RR mention K Wave a few times, but he seems to put little emphasis on it.

    Something similar-- in Rogers "Hot Commodities" book, he engages in commodity super cycle theorizing. He gives no explanation for why commodities go into super cycles other than a pseudo-empirical explanation that there is this perpetual over-under investment in commodities production, but nonetheless it serves as the underlying thesis for why to invest in commodities over the next two decades or so.

    It's a Sure Thing(tm)!

  2. It works in the free market. If you have the fed screwing with intrest rates and printing money how could it possibly work. It really is simple. The k-wave is a free market theory and thats why it doesn't work. We should have high interest now but its 1/4%. We should have had high interest before the deppression but it was 3.5%. The fed was the cause of the depression and government intervetion made it longer. The fed will cause this one and our debt load will make this one really bad.