Cycles and Bubbles

Second in a Series on Economic Depression by Ronald Logan, PROUT Institute Executive Director

At some point in the late 1980s I was exposed to the Kondratiev Cycle, first proposed by Nikolai Kondratiev a talented Soviet economist whose work predicted cycles of economic depressions.

In his 1925 book, The Major Economic Cycles, he introduced a theory of 50-60 year-long cycles of boom and bust in capitalist economies. Kondratiev’s works were suppressed in the Stalinist era (he was executed by Stalin in 1938), but were rediscovered in the late 1970s when his ideas on economic cycles eventually came to my attention. My interest in the Kondratiev Cycle was primed by my exposure to PROUT founder P.R. Sarkar’s article Economic Dynamics, which also predicted a coming great depression — one that would bring the downfall of capitalism.

Kondratiev’s ideas on long-term cyclic activity in capitalist economies have stimulated academic interest in what is now termed “long cycles” or “long waves” in economics. But as a predictor of depressions the wave cycle length proposed by Kondratiev was a failure, as no depression occurred in the 1980s-1990s as his cycle predicted. This was my first lesson in the lack of predictive accuracy of assumed economic cycles.

Ravi Batra’s Economic Cycle Theory

 Another proponent of long-range economic cycles as predictors of depressions is Southern Methodist University economics professor, Ravi Batra. Batra’s impetus for taking up study of economic cycles probably paralleled my reason for interest in the Kondratiev Wave: Batra, too, is a student of PROUT social theory. Most of Batra’s writings on PROUT have been on the “social cycle”, a powerful historical insight of the rotation of social classes in positions of dominance. But, as an economist, Batra has also had keen interest in Sakar’s economic ideas, and depressions in particular.

In brief, Sarkar’s argument is that, over time, capitalism breeds growing concentration of wealth, which becomes the main underlying cause of depressions. In his popular 1987 book, The Great Depression of 1990, Batra presented this argument with fidelity to Sarkar’s thesis. But he then diverged to present his own analysis that the timing of the onset of depressions is determined by regular cycles of money supply, inflation, and economic regulation. Batra used this analysis to predict that a devastating depression would occur around 1990. (There was, however, the severe 1990-1991 recession in which over 1000 American Savings and Loan banks faltered, requiring a $160 billion bailout to staunch the contagion.)

When the predicted depression failed to materialize he became known as “Dr. Doom,” lost credibility in academic circles, and became unable to publish in mainstream economic journals. Which is too bad, as many of Batra’s ideas have much merit. Among them is his spot-on critique of “economic tricklism,” in which he totally nails the folly of supply-side economic policy. Batra still gets interviewed from time to time (especially when investment markets get shaky), and a few astute people pay attention to his take on the economic affairs. (See, for example, Thom Hartmann’s 2013 interview with Batra at http://www.thomhartmann.com/blog/2013/03/transcript-thom-hartmann-coming-economic-crash-dr-ravi-batra-19-march-13).

Futility of Analyzing Economic Cycles?

As predictors of economic depressions, the Kondratiev Cycle and of Batra’s cycles of money supply, inflation, and regulation have been fails. Is it appropriate, then, to dismiss the notion of economic cycles as being of no value for predicting economic boom and bust? While Kondratiev’s and Batra’s long cycles must be dismissed, there is a shorter length economic cycle that is more predictive. This is the “business cycle” of periods of economic growth followed by periods of stagnation or decline, i.e., of booms followed by contractions. If these contractions are deep and long enough — a GDP decline of at least 10 percent and lasting at least two years — they are called “depressions”. If less sever, they’re termed “recessions.”

While the timing of economic contractions does not have precise regularity, there is more consistency than not. As a TIME magazine article (“Made in China: The Next Global Recession”) recently quoted Morgan Stanley economist, Ruchir Sharma, as observing, “Historically, global recessions happen every eight years.” My Wikipedia fact check on Sharma’s claim turned up the following recession dates for the past 35 years: 1981-82, 1990-91, 2001, and 2008-09. So, averaging to about 8.5 yrs.

As of now (June 2016) we’re at 8.5 years since the December 2007 start of the Great Recession. As the above cited TIME magazine article goes on to mention, “There has been more stock-market volatility over the past few months than in all of the past several years combined,” and “Most of the world’s top economic forecasters have begun to wonder if 2016 will bring a full-blown global recession.” Which is to say, we’re due for another downturn, and there are indicators that one’s on the way.

When Investment Bubbles Pop

Volatility in investment markets is a troubling sign as investment market crashes can be the proximate cause of an economic downturn. This famously occurred when the Black Monday market crash of 1929 triggered the Great Depression. In the past three recessions also, the popping of investment bubbles served as triggers for the onset of economic downturns. In the 1990-91 recession, there was the massive failure of the overextended American Savings and Loan banks. In the 2001 recession, there was the collapse of the “dot com” investment bubble. And the Great Recession was precipitated by the bursting real estate bubble.

Is there a new investment bubble on the horizon about to pop? TIME magazine’s “Made in China” article points out that China’s real estate development boom, along with its overheated stock-market, fits the bill: “China has cooked up its own epic debt bubble, which has grown at about three times the rate that the

[American] sub-prime bubble did.” And, further, “China’s debt bubble is now popping.” At the beginning of the year, early tremors from this popping rocked the Chinese stock markets and destabilized global markets.

Unfortunately, a massive deflation of the Chinese real estate bubble would occur at a time when the causes of the Great Recession were never really fixed. The mountains of financial debt present in 2007 — despite trillions in subsequent losses — didn’t go away. And reckless investing in non-productive financial assets was never curbed. In today’s world of globalized financial markets, financial contagions spread quickly. So when the real estate bubble bursts in China, the impact won’t end there.
The popping of investment bubbles may trigger economic downturns, but this is only their proximate cause. The underlying causal dynamics is its own topic, one that I’ll turn to next in this series. As I’ll argue, our situation is perhaps far worse than an incipient popping bubble, or an ensuing run-of-the-mill economic recession. The whole system is about to come apart.

 

By | 2016-10-12T23:45:01+0000 June 1st, 2016|Ronald Logan|0 Comments

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