It is fascinating to look back on previously written economic articles and review the theories of what the economy will do. The fascination comes from looking at the predictions in relation to what has actually happened. I guess that is the problem with making predictions. Your words are there for all to look at and evaluate. This is especially true with the advent of the internet.

There was an article written by David Chapman in June, 2002 explaining what Kondratieff Waves were. It was a very informative article. What made it better was that Mr. Chapman is an economist so he has a better understanding of economics than most people and was able to explain Kondratieff’s theory in a way that was easily understood.

Nickolai Kondratieff was a Russian economist who lived from 1892 – 1938. His Kondratieff Long Wave (K-Wave) theory stated that economics move in 50 to 60 year durations. He identified four distinct phases of economics which are, inflationary growth, stagflation, deflationary growth, and then depression.

Inflationary growth is the process of the economy expanding with slow rising prices, low and stable interest rates and rising stock prices. Stagflation (recession) has rising prices, rising interest rates, price inflation and rising debt. Deflationary growth (plateau) has sharply rising stock prices, some profit growth, and sharply rising debt. The final stage of depression has falling prices, rising commodity prices, falling profits, falling stock prices and stable interest rates. During the depression stage a major war breaks out and numerous scandals occur.

According to Mr. Chapman, the latest cycle begin with the first stage occurring in 1949 – 1966, the second stage from 1966-1982, the third stage from 1982 – 2000 and we are now in the depression stage which begin in the year 2000.

He states that following the steep secondary recession of the early 80′s, the stock market entered the Autumn K-wave cycle. There were stock market and real estate bubbles and collapses in commodity prices and interest rates with low inflation. He states that each succeeding recession required higher debt levels to purchase an additional dollar of GDP. Now we are encountering massive amounts of debt as the government strives to deal with the economic crisis that come with the depression stage. The latest crisis being the bursting of the real estate and financial bubbles.

In 2002, Mr. Chapman stated we could see the Dow Jones fall to around 5,000. He stated that the highs of the year 2000 would become a only a dream for many years to come. What is fascinating is that the Dow Jones hit a low point at the beginning of 2009 of 7,000. Not quite the 5,000 predicted but pretty close. Mr. Chapman stated that the depression cycle will usually last for a generation or around 9 – 20 years. If we did in fact enter this stage in 2000, then we are probably in for a number of additional years of depression. His advice in the article was to make sure you invest in stable commodities including gold.

Once again, I find it fascinating that what he stated has pretty much come true. My wife and I have talked recently about the generational status of economics. My grandparents lived through the depression of 1929. They taught their children about saving and living thriftily. My mom taught me the same principles but they were of course filtered. Now my children which are four generations removed from the great depression are living a “have it now” lifestyle. I feel that this is pretty much what the Kondratieff economic theory states. We get so far removed from a true depression that we forget what it was like to live through it. Then we have to repeat the experience to pull us back to reality. Nature does ultimately return to its starting point.

I guess what I am trying to indicate is that we may not be completely out of this mess yet. We may yet have a few years of pain until we re-enter the initial economic phase after having learned some very valuable lessons.

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Tags: depression, economic cycles, K-Wave, Kondratieff wave, rising debt