The K wave was identified in the '20s by Kondratieff, a Russian economist who studied capitalist systems. When asked by Stalin in the '30s if the Great Depression was the collapse of capitalism predicted by Marx, he said no; based on his work, the West would rise again. For his insight, he was sent to the Gulag. Unfortunately for him, he never returned. Fortunately for us, his work filtered out.
Like all cycles, the K Wave is more descriptive than prescriptive, but provides enormous insight into our current economic condition.
The K wave is a 54 year cycle (+/- a year or so) with internal phases that are sometimes characterized as seasons: spring, summer, etc.
- Spring phase: a new factor of production, good economic times, rising inflation
- Summer: hubristic 'peak' war followed by societal doubts and double digit inflation
- Fall: the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
- Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression. A 'trough' war breaks psychology of doom.
- Spring: New factor of production emerges, happy days are here again, cycle begins anew.
K-wave I: 1789-1842. New factor: canals. 20 good years. 1812, peak war. US invades Canada, gets slapped back. White House burns. 1815-1824, inflation, turmoil, weak Prez (John Quincy Adams), end of Federalist rule. 1828, Andy Jackson elected, false plateau of prosperity. 1837, Bank of US canceled, severe depression, deflation. Ends with trough war, Remember the Alamo! we win Texas from Mexico.
K-wave II: 1843-1896. New factor: RRs. 1861, peak war. 1865-1873, reconstruction, inflation from fiat money, Prez impeached. Turmoil. 1873, RR fiasco, financial panic. First bought of deflation as Civil War inflation ended. False plateau of growth. 1879, return to gold standard. 1983, second RR bubble bursts. Deflation continues. Ends with trough war, Remember the Maine! we conquer Spain's colonies.
K-wave III: 1897-1949. New factor: oil/autos. 20 good years. US becomes world economic leader. 1914, peak war to end all peak wars. 1917-1921, inflation, turmoil, scandal (Teapot Dome). Coolidge becomes Prez. False plateau. Roaring 20s. 1929, Crash. Depression. Severe deflation. Ends with trough war, Remember Pearl Harbor!, Pax Americana.
K-wave IV: 1950-2007. New factor: aerospace. 20 great years. American Century. 1966, peak war: Vietnam! Rising inflation. Wage and price controls. Oil crisis. Nixon resigns. Vietnam war is lost, American innocence gone, stagflation, Prez Carter blaming malaise not on government but on the people. 1980, Reagan elected. Morning in America. Volcker kills inflation. False plateau! Greed is good. 1990s, deflation in Japan, dot-coms in US, Greatest Asset Mania of All Time, bubble bursts, now in longest bear market since 1930s. A bit early, trough war, Remember 9/11! we go into nation building.
The timing of prior K-Waves would have suggested a bottom in 2004 after the dot-com bubble, but instead the really bad patch didn't start until 2008. Why? Perhaps because the massive injection of liquidity in 2003, which I call the Greenspan Indian Summer that extended K-Fall before K-Winter set in.
Greenspan Indian Summer: 2003-2007: Greenspan is fairly clear (for a central banker) that in 2003 with low interest rates he was attempting to stave off the deflationary depression that normally follows the bursting of an asset bubble - the Kondratieff Winter, which was he referred to mentioned by name. The latest Fed chairman is a self-acclaimed expert in deflationary depressions, and got the nickname Helicopter Ben for a speech he gave in which he said the Fed could always prevent a Kondratieff Winter by helicoptering in money and dropping it on the economy.
The Greenspan experiment failed. The Bernanke Experiment is still on. The Austrian School cherishes this quote from Mises:
There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.