Kondratiev Predicted the Great Recession

Kondratieff waves are named after the Russian economist Nickolai Kondratiev who lived in the early 1900’s.  He advanced the theory that capitalist economies undergo 50-60 year cycles of economic prosperity lasting about 25-30 years followed by 25-30 years of economic stagnation and even contraction.  He advanced this theory and brought it to international attention in his 1925 book, The Major Economic Cycles.  His theories were ultimately not appreciated by the Russian government, and he was executed by firing squad in 1938.  Joseph Schumpeter, another famous economist of the 1930’s, proposed calling these cycles K-waves in honor of Kondratiev.

Kondratieff waves, also known as K-waves or Supercycles, are characterized by an ascendant phase of an increase in prices and low interest rates and a descendant phase consisting of a decrease in prices and high interest rates.  Kondratiev identified three distinct periods in the complete up and down cycle: expansion, stagnation, and recession.  Some modern economists and commentators divide the cycle into four phases which are conveniently referred to as “seasons”.

The Kondratieff “spring” is a period of expansion and growth that will often accompany a major technological innovation.  The result is a shift in the way that work is defined and accomplished with shifts in wealth occurring as well.  “Summer” is a consolidation phase where the changes that occurred in spring are incorporated into the broader society.  Unfortunately, the “autumn” and “winter” periods are a consequence of the excesses of the previous two phases and are characterized by recession or depression and possibly wars which lead to the next cycle of growth and prosperity.

Having come through a major technological advance in the widespread adoption of the internet and its impact upon wealth distribution and the way we view work, it is interesting to read about Kondratieff and his theories.  While there might be a lack of “scientific” evidence that would convince the ivory tower economists, K-waves can make sense when considered in a broader societal context.  Their length even makes sense when considering the maturational time frame and investment needs of each subsequent generation.  You can’t help but be impressed that the current recession we are experiencing can be explained by Kondratiev’s economic theories.

I have been considering K-waves when it comes to my investing using the information as another piece of the puzzle when deciding what broad trends may be significant and profitable.  In a future article, I will discuss what investments you should consider making during each of the four seasons and look at recent history to make correlations.  In the meantime, be sure to check out the link to an impressive graph that was made in 2002 and eerily predicted the market crash and maybe even the bottom.