Wealthbuilder Stock Market Brief 1st. May 2015.

Kondratieff Waves and the Greater Depression 2013- 2020 update.

In February 2012 I wrote an essay on Kondratieff waves (K waves). At that time based on the
teaching of Nikolai Kondratieff it appeared that the world economy was in the middle of a
Kondratiev winter or greater recession. (See chart below).
The K wave is a 60 year cycle (+/- a year or so) with internal phases that are sometimes
characterized as seasons: spring, summer, autumn and winter:

Spring phase: a new factor of production, good economic times, rising inflation
Summer: hubristic 'peak' war followed by societal doubts and double digit inflation
Autumn: the financial fix of inflation leads to a credit boom which creates a false plateau
of prosperity that ends in a speculative bubble
Winter: excess capacity worked off by massive debt repudiation, commodity deflation &
economic depression. A 'trough' war breaks psychology of doom.

However, since 2012 the American stock market has not collapsed but moved to new highs. So
what is the explanation?

My contention is that we are in a financial greater-recession (depression) but it does not

seem so because it has not yet become a true economic depression. Let me explain.
The worst of the consequences of the greater-recession which began in 2000 have been
mitigated by the Feds and the bank of Japans Quantitative Easing policies. For example with
regard to the US Fed between 2008 and 2013 reserves held increased to nearly 2.5 trillion
dollars.
Reserve Balances Held at the Federal Reserve: St. Louis FED.

When we look to Japan we see from the chart below that the level of assets it holds as a
percentage of GDP was a whopping 45% in 2013.
Size of International Central Bank Balance Sheets: St. Louis FED.

This level of central bank intervention worldwide has completely skewed the operation of the
free markets. The consequential low interest rates and the availability of easy money to large
banks and institutions have resulted in a corrupted price formulation for commodities, real
estate, stocks and bonds. Thus when we should be experiencing deep price contraction we have
market booms across most asset classes.
As every follower of Ludwig Von Mises knows when you manipulate the pricing mechanism of
the free market nobody knows the true value of anything anymore and accordingly resources
become mis-allocated. Most K wave theorists observe this development with grave concern.

They know that there have been nearly 18 K wave cycles in world economic growth since 930
AD and the current manipulation of natural prices is only going to make the current
Kondratieff winter more catastrophic when it really takes hold. In other words the K winter
cycle has been pushed out but it has not been neutralized.
Anyone who does not realize that the USA is actually in a near depression should look at the
chart below. The level of central bank ownership of the US economy was near 1929 great
depression levels in 2012 and things have deteriorated since then.
Historical View of Federal Reserve Balance Sheet: St. Louis FED.

How long financial engineering, interest rate swaps, economic statistic modification and stock
buy-backs can be used to fudge the economic greater recession we are living through is
anyones guess.
When, due to the potential bankruptcy of the central banks of Japan, the EU, England and the US
the current musical chairs of floating currency wars, negative interest rates and quantitative
easing stops, my intuition tells me the true nature of our economic vulnerability will become
visible for all to see.
It is my contention, as mentioned in the last essay, that the current recessionary reality should
be accepted for what it is i.e. a depression and dealt with through honest policies rather than
through smoke and mirror QE delusion. World leaders must accept the reality of Kondratieffs
credit cycle discovery and let the current natural international credit contraction take its course.
The essential cause of the current K wave winter is a natural by-product of collapsing growth,
high debt, labour obsolescence, falling incomes and contracting employment. The type of
enlightened policies needed to deal with the crisis are:
1.
2.
3.
4.
5.
6.
7.

Ordered debt liquidation and restructure

Promotion of creative development.
Limitation of government regulation, taxation and control.
Efficient market pricing and asset allocation.
Availability of new non debt money to finance real growth, efficiency and productivity.
Distribution of purchasing power through fair wages and conditions.
Promotion of a new banking system based on sustainable economic growth rather than
negative money.

The current policies being endorsed by the likes of the European Union are the antithesis of the
above. Instead of debt liquidation we have debt sustained by additional debt. Rather than have
wage growth we have zero hour contracts with no minimum wage protection. Instead of the
promotion of new industries with cutting edge research and development we have existing
conglomerates stifling innovation through pork barrel regulation and repressive government
control.
The longer the inevitable K winter is ignored, the more violent will be the eventual political,
social and economic collapse. As the famous character Chancy Gardner said in the classic movie
Being There: after the winter, economically there will be growth in the spring. However, we
must be courageous enough to allow the current K winter to become fully manifest for this regrowth to occur anytime soon.
Crushing legacy bank debt is the problem. Debt liquidation through deep economic contraction is
the solution. As long as this Kondratieff truth is denied the longer will be the delay in the
commencement of world reinvention, renewal, rebirth and expansion.
Sources:
St. Louis Fed:

The Rise and Fall of the Feds Balance Sheet.

Lowell Ricketts & Christopher J. Weller, Jan. 2014.

Financial Sense:

Kondratieff Waves and the Greater Depression 2013 -2020

Christopher M. Quigley February Feb. 24 2012.

K Wave Chart:

Courtesy of Longwaveanalysis.ca

1st. May 2015 Christopher M. Quigley