As the 60-year cycle enters its final few weeks of descent, a few
conclusions can be made. We can also
make some projections as to what the foreseeable future might hold based on the
upcoming bottom of this important economic cycle.
Since the 60-year cycle is the primary cycle governing inflation
and deflation, it makes sense that its impact will be most strongly felt in the
prices of inflation-sensitive commodities.
Its force is also evident in wages, interest rates, and other factors
which influence the general course of the economy. One of the biggest areas affected by the
cycle is in earnings and income growth.
The graph below shows the year over year change in total earnings
in the U.S. since the 1960s. The peak in
earnings on a percentage change basis occurred around the time of the last
60-year cycle peak in the early 1980s.
After the plunge of the 1980s, earnings growth for production and
nonsupervisory workers has never come close to regaining the peak from 30+
years ago. This exhibit provides some
context for the influence of the economic long-wave and the economic trends it
generates.
Many observers have noted the disparity of fortunes in recent
years between the upper and lower classes within the U.S. The recovery of the last five years has
unquestionably benefited the upper class (the so-called “1 percent”). The massive rebound in equity prices has
helped the rich much more than the middle class due to the increased exposure
to the stock market enjoyed by the former group. The middle class by contrast has seen its
fortunes wane since the crisis years of 2007-2008. This is due in part to the middle class’s
lower exposure to equities and can also be attributed to the lack of wage
growth.
Another important reason for the lack of a strong rebound in the
middle class economy can be seen in the following graph.
The above graph shows the expenditures of the federal government
going back the last several years.
Following a brief spike in government spending in the post-credit crisis
period, the rate of change in expenditures plummeted and has never quite
recovered to its much higher historical average. This is one of the key reasons why the middle
class economy has been relatively slow to recovery since 2008.
During the last five years the middle class has seen its tax
burden rise along with cost of living increases, yet there has been no
commensurate rise in services provided.
In other words, the government has continuously taken from the pockets
of the working class without giving back in the form of direct spending, such
as infrastructural repairs, contract building, etc. This refusal to spend by the government
during a time of acute crisis for the middle class is effectively an austerity
policy. Government has persistently
focused on lowering the budget deficit in recent years by raising taxes and
through forced spending (e.g. Obamacare) instead of cutting taxes, which
paradoxically would have increased government tax receipts through the higher
levels of consumer and business spending it would have engendered.
What we have witnessed during the past five years has been a dual
fiscal and monetary policy of both austerity and stimulus: government fiscal
policy has been austere while central bank monetary policy has been
liberal. The net result of this conflicting
set of policies has been to force the brunt of the deflationary 60-year cycle upon
the middle class while shielding the moneyed classes from its effects.
Indeed, the Fed’s loose monetary policy known as QE has all but
blunted the impact of the final deflationary leg of the 60-year cycle for the
financial sector. Equity prices were
largely exempt from the final 5-6 years of the deflationary long-wave. The 2008 credit crash was essentially the
“super crash” that many long-wave analysts were calling for. It arrived a few years ahead of schedule but
was still within the final “hard down” phase of the 60-year cycle (defined as
the last 10 percent of the cycle’s duration).
The recovery since the 2008 super crash was fierce and unprecedented,
thanks largely to the scope and scale of the Fed’s intervention.
Now that the 60-year cycle is winding down we can see the last vestiges
of its deflationary pressure in certain inflation-sensitive commodities. The crude oil price has been in decline since
June, as you can see in the following graph.
Since a wide range of retail consumer prices are based on the oil price,
the lower the price of oil goes, the better it will bode for the retail
economic outlook entering 2015 once the new 60-year up-cycle kicks off.
