The upcoming bottom of the 60-year cycle will drastically alter
the U.S. economic landscape. The ending
of the long-term disinflationary/deflationary undercurrent will soon give way
to a new long-term cycle of re-inflation/inflation, bringing with it both
challenges and opportunities.
As we begin a new 60-year cycle, the main
challenge for the Federal Reserve will be to resist the temptation to stimulate
the economy during periods of sub-par growth.
The saying, “Old generals fight the old wars” applies here as the Fed
has always had difficulty in discerning the dominant economic
undercurrent.
For instance, from the 1980s onward, most Fed
presidents have had an abnormal fear of inflation after the harrowing
experience of the 1970s. Only in the
years following the credit crash has the Fed concentrated on fighting
deflation. After the unforgettable
experience of 2008, it doesn’t take much imagination to see the Fed fighting
the specter of deflation for years to come, long after deflation ceases to be a
threat.
If the Fed remains true to form we can
probably expect to see a continued commitment to a fairly loose monetary policy
in the first few years of the new 30-year inflationary cycle. The good news is that it will still likely be
several years before significant inflationary pressures come to bear. In the years immediately ahead we should see
an increasing volume of the excess cash on the sidelines returning to circulation. This will result in a gradual rise in
inflation, though it shouldn’t immediately result in runaway inflation. The second half of the 30-year cycle in the
years 2030 through 2044 is when hyperinflation will likely become an issue.
The following graph is a stark reminder of
the deflationary undercurrent of the last several years. It shows the velocity, i.e. turnover, of
money in the U.S. economy.
At
some point the velocity of money will reverse its long-term decline as
confidence increases and investors realize that the threat of deflation has
disappeared. Will the hundreds of
billions in sidelined money enter the economy as a slow, gradual trickle? Or will it re-enter the channels of commerce
quickly as a mighty onrushing torrent?
Since no one can definitively answer this question, the wisest policy
would be for the Fed to resist the temptation to employ money printing schemes
as a palliative for boosting the economy, especially as this will be
unnecessary in the years ahead.
In his March 11, 2009 “Special Edition VII” entitled, “Terminal
Opportunity 2009,” Samuel J. Kress described the 60-year cycle as the
primary bias or “Super Cycle,” with the 30-year cycle being the
half-component of the 60-year cycle, also known as the secondary bias cycle. Kress wrote:
“The 60-year [cycle] correlates to the average duration of the
underlying economic ‘super cycle’ which ranges from 40-80 years. This cycle was identified in the early 1900s
by a Russian economist, Nikolai Kondratieff, which tracks wholesale commodity
prices, and being void of any value added, it represents real demand in the
economy. Additionally, it indicates the
boom/bust phase of the credit/debt cycle.
Being variable in duration, it is more appropriately referred to as the
K Wave. It includes four (completeness)
economic seasons: spring, summer, fall, winter.” [Special Edition VII, Terminal
Opportunity 2009, p. 2]
The chart example labeled “60 Year Super Cycle” is an illustration
from a past Kress Special Edition and delineates the phases of the 60-year cycle. It is broken down into four 15-year segments
which are known as economic “seasons.” The
following graph correlates each season to its appropriate inflationary or deflationary
aspect over the previous 60-year period from 1954 through 2014.
The first 15-year segment of the 60-year
cycle is characterized by re-inflation; the second 15 years typically sees
increasing inflation or even hyperinflation.
The next 15-year segment sees disinflation or early deflation, and the
last 15-year segment is the deflationary phase.
Each 15-year segment of the 60-year cycle is assigned a “season,” e.g.
winter, spring, summer, fall.
Is it possible that the years immediately ahead could see
above-average inflation? The answer is
yes, but only if there’s an unusual dynamic in place. An example of an unusual dynamic would be the
outbreak of a major war. War is always
inflationary for commodity prices and would only serve to heat up the economy
faster than the new 30-year inflationary cycle would do on its own.
Following the 60-year cycle bottom of 1774, for example, inflation
was a major problem in the colonies during the U.S. Revolutionary war in
1777-79. At that time a pound of butter
cost $12 a pound while flour fetched nearly $1,600 per barrel in Revolutionary
Massachusetts. Keep in mind this was
only 3-5 years after the long-term Kress cycle bottomed. Jason Zweig observed that inflation was also
a major problem during the U.S. Civil War.
During the war years in the early-to-mid 1860s, “inflation raged at
annual rates of 29% (in the North) and nearly 200% (in the Confederacy),” he
writes. He also points out that
immediately following World War II, inflation hit 18.1% in the U.S.
Turning our attention to the stock market, many analysts have
taken up the theme that another major correction or even a crash is just around
the corner. The thinking behind this is
that the stock market rally of the last five years artificially induced through
the Fed’s monetary stimulus. Under the
bears’ theory, once QE completely ends the markets will experience a major
re-valuation and a return to a “normal” price level.
In response to this scenario, an observation can be made that the
market is already back to “normal.”
Consider that equities, which desperately wanted to rally in the years
between 2004 and 2007, were held back from realizing their full potential by
the tight Fed policy of the time. The
Fed’s interest rate policy of 2004-2007 did the economy no favors and was one
of the catalysts behind the credit crash of 2008. When finally the Fed got its investment rate
policy back in alignment with the long-term cycle, the market quickly returned
to its proper level as the economy recovered.
Consider, too, that we’ve come through a tumultuous 15-year period
which saw two major bear markets, the constant threat of terrorism, a two-front
multi-year war, and the near-collapse of the U.S. economy. The years between 2000 and 2014 can therefore
be described as an elongated “correction” in the super long-term uptrend in
America’s progress. A few years ago
there was a question as to whether or not the economy would survive the
upcoming 60-year cycle bottom. With
hindsight it’s now obvious that the last 15 years of the cycle – the
deflationary phase – was cleansing and restorative rather than ultimately
destructive.
There is every reason for believing the next few years of the new
60-year cycle will be as salutary to the economy as the previous 15 years were
depressive. A new economic spring season
will soon follow the economic winter of the last several years. With the coming of long-wave spring we should
see increasing signs that the economy is returning to a normal, healthy rate of
growth. The fear and uncertainty that
were prevalent in the last 15 years will gradually subside and be replaced by
rising confidence as investors and businesses take more chances and spend more
money into circulation. The rising tide
of long-wave spring will lift all boats as a greater segment of America’s
social classes begin to experience an economic rebound from the depressing
years of the winter season.
At long last, it’s time to bid the 15-year economic winter adieu
and welcome the onset of spring!
