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K-cycles or Kondratieff cycles – we are in economic Winter

Date: 29 Jun 2012 23:00

K-cycles is a theory which is remembered during long downsides, when hopes for return of economic growth fail for several years. Now is exactly the same time.

How do k-cycles work?

According to K-cycle theory, economy has long cycles of 50-60 years. Each phase of the cycle is favorable to a set of investments.



Source: http://www.mitonoptimal.com/include/pdf/media/109/WeeklyComment-Week4.pdf

What is the length of the cycle?

Scott A. Albers and Andrew L. Albers on 30 March 2012 published a serious and innovative paper "On the Mathematic Prediction of Economic and Social Crises: Toward a Harmonic Interpretation of the Kondratiev Wave" analyzing US cycles (http://mpra.ub.uni-muenchen.de/37771/1/MPRA_paper_37771.pdf). Key conclusions:

Using a range of 7-year to 18-year “spreads,” we find that this approach provides strong evidence that American economic history is composed of four 14-year quarter-cycles within a 56 year circuit in the real GNP of the United States,1869-2007. These periods correlate closely with analysis by Nickolai Kondratiev and provide a framework for predicting an annual steady state rate of growth for the United States falling between 3.4969% and 3.4995% per year.

So, US cycles are 56 years long and (by the way) the long-term US GNP growth is 3.5%. It's a fact worth to remember.

Good research of global k-cycles could be find in "A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis", Korotayev, Andrey V and Tsirel, Sergey V (http://escholarship.org/uc/item/9jv108xp). Key conclusions:

Our spectral analysis has detected the presence of Kondratieff waves (their period equals approximately 52–53 years) in the world GDP dynamics for the 1870–2007 period.

So, global k-cycle is 52-53 years.

Where are we in the current k-cycle?

This is the most interesting question. All the sources I saw tell that:
  • We are in the middle of Kondratiev's Winter
  • Spring will start approximately in 2020
Good pictures are very rare in the analysis of k-cycles, here are the best examples I saw:



Source: http://www.financialsense.com/sites/default/files/users/u297/pdfs/2010/MacroSlides4Q10.pdf

Source: Masaaki Hirooka, Nonlinear dynamism of innovation and business cycles, 2003

One more opinion from Evan Gilbert, Head of MitonOptimal Asset Consulting, 26 January 2012: Where are we now? We believe that some emerging market economies (China, India, SA and Australia) lie in the Autumn phase – at about two o’clock. While prices of almost all assets rise in this environment, the future is not rosy – winter is coming as debt levels start to build in these apparently benign conditions. Developed markets have been suffering through winter in the last four years and it’s not quite over yet – we see them at around 5 o’clock. We expect them to move into the Spring phase in the next ten years. This is the basis for our increased allocation to equities, and decreased allocation to bonds. Our strategic positioning is fundamentally for Spring, but we are also very conscious of the onset of Winter in emerging markets – that’s what’s going to guide our tactical allocations.

Source: http://www.mitonoptimal.com/include/pdf/media/109/WeeklyComment-Week4.pdf

Application of K-cycles theory

The theory never became widely used due to several problems:

1) Hard to find an indicator which follow at least 2-3 k-cycles (110-165 years)

2) Today any country's' economy experiences a combination of several k-waves.

K-cycle theory is good to explain long waves in one economy – like US or Europe. Before 1990s when the world was not so globalised as it's now it was possible to apply the theory to these economies. I believe it would work well in a totally globalized world. But now we are in the transition period from partly integrated world to a fully global world.

That means any economy experience a combination of k-waves: local one and several from outside, coming mostly from the biggest trading or investment partners. For example, China experiences a superposition or combination of a Chinese k-wave, US k-wave and probably European k-wave. One more complication to the analysis is that as China becomes more oriented on internal demand, Chinese k-wave becomes more important than US and European.

History: Nikolai Kondratiev

Nikolai Kondratiev died in 1938 in the Russian Gulag. Kondratiev was a Russian agriculture economist who, while working on a five-year plan for the development of Soviet agriculture, published his first book, The Major Economic Cycles, in 1925. Over the following years he carried out more research during visits to Britain, Germany, Canada and the United States.

In his book and in a series of other publications he outlined what later became known as “Kondratiev Waves”. These were observations of a series of supercycles, long surges, K-Waves or long economic cycles of alternating booms and depressions or of periods of strong growth offset by periods of slow growth in capitalist societies. These waves or cycles were at the time calculated to last from 50 to 60 years, or roughly a human lifetime in those days.

Kondratiev applied his theories to capitalist societies, most notably to the US from the time of the American Revolution. His undoing came in 1928 when he published his Study of Business Activity in the Soviet Union that came to much the same cycle conclusions for the Soviet economy that he had noted for capitalist societies. He fell out of favour with Josef Stalin, who saw his treatise as criticism. Kondratiev was arrested and following a series of trials he was banished to the Gulag, where he died.

Source: http://www.safehaven.com/article/23510/kondratiev-is-alive-and-well


Tags: Economic cycles, K-cycles, Russia



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