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How to Get Rich Investing in Stocks by Riding the Electron Wave

The Inflation Deflation Debate and Myth of the Kondratieff Wave

Economics / Economic Theory Jun 28, 2009 - 08:12 AM GMT

By: LewRockwell


Diamond Rated - Best Financial Markets Analysis ArticleGary North writes: Do you want to lose money? Invest in terms of the Kondratieff wave.

Do you want to misunderstand completely the relationship between economic production and prices? Adopt the Kondratieff wave as your tool of explanation.

Maybe you have not heard of the Kondratieff wave. But if your favorite investment guru is structuring his recommendations in terms of the Kondratieff wave, you are in big trouble if you have followed his advice.

The Kondratieff wave is a supposed macroeconomic force that creates a 54-year cycle of boom and bust. There is no explanation for it. The man who discovered it, or thought he had, said that there was no theory to explain it.

There may be a Kondratieff cycle: a cycle of popularity for this theory-free assertion of inescapable economic boom and bust cycles. We are now in a boom phase of its popularity. It had a similar boom, 1975–85.

In short, the Kondratieff wave, like Frankenstein's monster, like Dracula, like Godzilla, like Freddy Krueger, is back. Like the other four, it offers thrills and chills. It offers excitement. It also offers a myriad of ways to lose money.


These days, the Kondratieff Wave has a spiffy new name: the K-Wave. (I can almost hear it: "Attention: K-Wave shoppers!")

The K-Wave is supposedly going to bring a deflationary collapse Real Soon Now. The Western world's debt structure will disappear in a wave of defaults. Kondratieff's 54-year cycle is almost upon us.


The last deflationary period ended in 1933. This became clear no later than 1940. World War II orders from Great Britain, funded by American loans and Federal Reserve policy, ended the Great Depression by lowering real wages.

In 1942, price and wage controls were imposed by Washington, the FED began pumping out new money, ration stamps replaced the free market, the black market overcame shortages, and the inflationary era began. That was a long time ago. But the K-Wave is heralded as a 50 to 60-year cycle, or even more specifically, a 54-year cycle. That's the entire cycle, trough to trough or peak to peak.

The K-Wave supposedly should have bottomed in 1933, risen for 27 years (1960), declined in economic contraction until 1987, and boomed thereafter. The peak should therefore be in 2014.

There is a problem here: the cyclical decline from 1960 to 1987. It never materialized. Prices kept rising, escalating with a vengeance after 1968, then slowing somewhat – just in time for the longest stock market boom in American history: 1982–2000.

OK, say the K-Wavers: let's extend the cycle to 60 years. Fine. Let's do just that. Boom, 1932–62; bust, 1963–93; boom, 1994–2024. Does this correspond to anything that happened in American economic history since 1932? No.


Who was Nikolai Kondratieff? He was an economist under Lenin, who had some influence in promoting Lenin's New Economic Policy (NEP), which re-introduced limited private ownership locally. He wrote articles on capitalist cycles, published in 1925 and 1926. He was arrested in 1930, after Stalin came into power. Stalin sent a letter to Molotov asking for Kondratieff's execution. He was arrested and sent to Siberia for eight years. Stalin had him executed in the Great Purge of 1938. The court gave him 10 years in prison. He was executed the same day.

For reasons unknown, the mid-1970's saw a revival of interest in the Kondratieff wave. Hard-money newsletters kept telling their subscribers that the economic peak had passed, that a 30-year period of secular economic decline was about to begin.

Julian Snyder was the most visible of these newsletter editors. His International Moneyline ($282/year – $560 in today's money) began predicting this cyclical decline sometime around 1976. He even went so far as to pay for a translation of Kondratieff's Russian language articles, which he published as The Long Wave (1984). In 1989, Richard Russell took over the unexpired subscriptions for International Moneyline. Mr. Snyder promptly disappeared . . . one hopes not as Kondratieff did.

In 1985, John Shuttleworth, the founder of Mother Earth News, came back to write a guest column. He summarized the "state of the Kondratieff union."

Many of you will remember that as far back as issue 44 (March/April 1977)], this column has explored and quoted from the 1920s work of Russian economist Nikolai D. Kondratieff. Particularly as interpreted by Julian M. Snyder, editor and publisher of International Moneyline ($282 a year from 25 Broad St., New York, NY 10004). . . .

Julian Snyder is a good friend of Massachusetts Institute of Technology Professor Jay W. Forrester – another Kondratieff student – and, in recent months, has quoted the good professor extensively. According to both Forrester and Snyder, the last expansion phase of Western society ran from 1945 to a peak in 1974 . . . before plunging into the sharp 1974–1975 recession. During the plateau period that followed, business – as we all know – was fundamentally tired, credit became increasingly overextended, and economic activity in general was sluggish. At the same time, however (especially during 1984), the forces of inflation wound down . . . and we've all enjoyed rising purchasing power without the pain of higher prices.

Forrester's MIT studies indicate that the 1981–1982 recession (the worst downturn since the Great Depression of the '30s) was the first leg of the approaching downswing. "What lies ahead," says Julian Snyder, "is another Great Depression that will color your life until the end of the century. However, it will not likely be a reprise of the thirties."

Some of you may remember Prof. Forrester. He assembled the computerized data that led to the publication of a best-selling book, The Limits to Growth (1972), which in retrospect became notorious for being the Siamese twin of Prof. Paul Ehrlich's legendary book, The Population Bomb (1968). Together, they remain the two landmarks of the "running out of resources" school of economics. They were, in short, dead wrong. Commodity prices began to fall in 1981 and continued to fall until the turn of the century. No 20-year period in man's recorded history has matched this decline in commodity prices, making the world richer. Wages did not fall.

There was a chart that supposedly proved that the crash was near. If you search Google for "Kondratieff wave" and "chart," you will find it all over the web. This chart was, as they say, "idealized." This means "faked," but nobody used that term. It was a chart of wholesale prices, which have nothing to do with cycles. Here it is, in all its glory.

There is always a market for bearish stock market scenarios. It doesn't matter what theory is offered. There are believers who love the conclusion but who don't have the ability to explain the particular chart, theory, or logic behind the forecast.

Here is an oddity. In 35 years, I have never seen a bullish stock market forecast based on the Kondratieff wave. Yet half of the time a cycle is in the upswing. Why isn't there someone out there who made his subscribers a lot of money by using the Kondratieff wave to forecast the peak (sell short) and the trough (go long)? Why is it that the cycle's peak is always immediately behind us? Why is it that we are never in the trough?


Kondratieff admitted that there was no theoretical basis for his cycle. He also admitted that some of the price data revealed no traces in his cycle. He selected two groups of "elements of economic reality," as he called them. This is from The Long Wave Cycle (Richardson & Snyder, 1984).

The elements of the first group were characterized by the fact that, along with the fluctuating processes, their dynamic did not manifest any general growth or decline (secular trend), or else that trend was scarcely noticeable – at any rate, for the period under observation (p. 33).

What was he talking about? For one thing, commodity prices. He admitted: "In processing the statistics on the dynamics of the series of this group, I used simple analytical methods to bring out the long cycles" (p. 33). In short, he manipulated the evidence until he obtained a pattern.

He said he found patterns in other statistics. But was there an underlying economic reality, "some real trends in economic development? This is a very big question, and I cannot now elucidate it." Yet this is the heart of his supposed cycle. "We do not have a method for determining how accurately a theoretical curve reflects real evolutionary-economic trends" (p. 35).

All that he could find in the pig iron and lead statistics was one and a half or maybe two cycles (p. 52).

. . . we did not succeed at all if finding long cycles in the dynamics of cotton consumption in France, and wool and sugar production in the United States, or in the dynamics of certain other series (p. 58).

As has already been noted, in my own investigation I discovered series in whose dynamics there were no long cycles (p. 62).

As for the pattern of the long cycle,

First, I emphasize its empirical character: as such, it is lacking in precision and certainly allows of exceptions. Second, in presenting it I am absolutely disinclined to believe that it offers any explanation of the causes of the long cycles (pp. 68–69).

He was frank about the extreme limitations on his data and his findings. His disciples are not.


It is superfluous for me to wax eloquent on the theoretical and statistical deficiencies of the Kondratieff cycle, when Murray Rothbard did it so well in 1984: "The Kondratieff Cycle: Real or Fabricated?" Let us begin here:

Business cycles began a mere two centuries ago. Despite the fevered hopes of some enthusiasts who claim to have observed business cycles going back to Methuselah, before the late eighteenth century there was no such phenomenon.

Kondratieff admitted as much. He had no price data for most of Europe that preceded 1850. He had some from around 1800 from England and the United States. But I can tell you as a man trained in economic history, the records are incomplete. When the Nazis bombed London in 1940, a bomb took out part of the British Museum. My teacher, Herbert Heaton, found that much of the information he needed in his work was destroyed. In one case, he had to go to centuries-old breweries on the Thames River for records of grain prices after 1780. That's what he told us in the late 1960's. Rothbard continues:

One of the worst things about the "business cycle" is its name. For somehow the name "cycle" caught on, with its implication that the wave-like movement of business is strictly periodic, like the cycles of astronomy or biology. An enormous amount of error would have been avoided if economists had simply used the term "business fluctuations." For man is all too prone to leap to the belief that economic fluctuations are strictly periodic and can therefore be predicted with pinpoint accuracy. The fact is, however, that these waves are in no sense periodic; they last for few years, and the "'few" can stretch or contract from one wave to the next. The periodic notion was unfortunately fed by the fact that the early panics seemed to be ten years apart: 1837, 1847, 1857, but pretty soon that periodicity broke down.

Then he gets to Kondratieff's cycles.

Kondratieff postulated a "long wave" of business that began somewhere in the late 1780s – it is all very murky since there are almost no statistical data for that period – and continues periodically roughly every 54 years. Well, what about the trough points? No question that the late 1930s – a "Kondratieff trough" – was a pretty miserable period. But what about the other three trough periods? What was wrong about the 1780s, for example? No particular depression there. And if we want to be generous and dismiss that "first trough" for lack of data or as only starting the whole thing, what about the alleged second trough? Fifty-four years from 1789 brings us to the "expected" trough year of 1843, a year in which everything was smooth sailing. Let us be generous and bend over backward for the Kondratieffites, and give them their admitted 1849 as the trough year. Even so, 1849 was a perfectly fine economic year, and in no sense whatever comparable to the late 1930s! In 1849, we were in the middle of continuing prosperity. . . . Let us then look more closely at the long contraction, or "long depression," phases of the Kondratieff cycle.

To make any sense, they should in some way look and feel like depressions, like grim periods of decline in business activity. The first Kondratieff long depression was supposed to be the period 1814–1849. But these thirty-five years were by and large a period of great expansion, prosperity and economic growth for the United States, England and France, the three countries Kondratieff used for his statistical analysis. And what of the second Kondratieff depression, the period 1866–96? Was that in any sense a depression? For the United States, and to a large extent for Western Europe as well, this was the period of the most dazzling spurt of production and economic growth in the history of the world. Production and living standards skyrocketed. How in the world could three such glorious decades be called a period of secular decline?

Rothbard goes on for pages, peak by peak, trough by trough. He shows that Kondratieff's alleged dates for the peaks and troughs do not correspond to the general economy in the United States. Then he delivered the final blow. This, remember, was in 1984, at the beginning of the longest boom in American history.

But the Kondratieffites' problems have only begun. Their real difficulties come after the alleged Kondratieff trough of 1940 – the last trough so far. The entire boom-bust "long" cycle is approximately 54 years in length. Allow a few years here and there. But still: It has already been 44 years since the Kondratieff trough. A 44-year boom! So where's the peak? The peak is getting long overdue. Most of the Kondratieffites confidently predicted that the peak would arrive in 1974, just 54 years after the previous peak. Previous peak-to-peak stretches had been 52 (from 1814 to 1866), and 54 (1866 to 1920). So where indeed is the peak? It is now 1984 and counting. We are ten years past the confident prediction and we still have inflation. The Kondratieffites have been forecasting imminent deflation since the magic 1974 year, but still . . . nothing!

Then Rothbard made a prediction. It has proven to be a bad prediction. It held up throughout the 1990s, but it is no longer accurate.

No, the Kondratieff is dead, and now it is simply a question of how long it will take the Kondratieffites to lie down, to admit defeat and slip away into the night. How many years will it take before everyone sees that there has not been and will not be a "fourth peak"? And without such a peak, there can be no cycle.

The old-timers died off. The newsletters that hyped the K-Wave ceased publication. The gold conferences faded into the mists of time. But a new generation of lemmings is headed toward the cliff.


Two years before Rothbard published his critique, John Pugsley wrote a detailed critique of Kondratieff's cycle. He ran it in his newsletter, Common Sense Viewpoint (Nov. 1982). I remember it well, and I contacted him to see if he would FAX me a copy. He did.

He began with the observation that all of the promoters of the theory were forecasting 30 years of recession and deflation. This was in 1982, the year the Dow Jones Industrial Average bottomed in mid-August, at 777.

Kondratieff had at most two and a half cycles in his two papers. That number was available for only four data series. Of the 36 data series, he could find evidence of cycles in only 11 of them. The monetary series and the real series correlated in only 11 of 21 series, all short.

Pugsley then cited extensively from an article by C. Van Ewijk of the University of Amsterdam (The Economist, Nov. 3, 1981). Van Ewijk noted that Kondratieff followed no consistent methodology in choosing the types of trend curves that he selected for different data sources. Kondratieff used various statistical techniques to smooth the curves to make them appear as long waves. "In case after case, no wave could be identified." He used price data, but these did not correlate with the actual economic output of the four economies that he studied.

Then the waves that he presented were further "idealized" by whoever created the chart that has circulated ever since. Pugsley noted: "The upward movement of prices from 1933 to the present has already spanned fifty years, which is supposed to be the average length of a complete cycle."

So far, price inflation has extended for about 75 years. Yet the deflationists are still predicting long-term, severe price deflation, and some of them invoke the Kondratieff wave to prove their assertion. Pugsley concluded:

In not one case does the evidence corroborate the existence of the wave. Prices and output are not directly related – if anything they are inversely related. The forty-five to sixty-year period of the wave is only partially evident in the nineteenth century, and then only in the price series. Price moves in the twentieth century do not correspond to this periodicity, as claimed by long-wave proponents. There is absolutely no statistical correlation between series of real variables such as production and consumption, and monetary series such as prices and interest rates. Production and prices of the four countries studied do not statistically correlate; thus there is no wave operating coincidentally in the industrialized countries.

In other words, Kondratieff's hypothesis is simply not supported by any evidence. The long wave exists only in the minds of a few misguided analysts, but not in the real world. It is pure hokum.


You may think that I am devoting way too much space to this. But I want my readers to understand why Kondratieff was wrong in 1925. His popularizers were even more wrong in 1975–85, with their "idealized" chart, and their contemporary heirs' unwillingness to learn from the fact that the downward phase of the cycle is now 44 years late. It should have begun no later than Kennedy's administration: 1932+30=1962. This assumes that the original downward phase was due in 1932. It wasn't. It was due around 1926: 1896+30=1926. It should have lasted until 1956. But 1945–73 was a boom era, with mild recessions and remarkable economic growth per capita.

Forget about a K-Wave which is going to produce price deflation. The Federal Reserve System remains in control. Sorry about that. It is creating new money. Long-term price deflation of 5% per annum is not in the cards or the charts – anywhere.

I recommend that you not take seriously arguments to the contrary that are based on the latest updated version of the K-Wave. The K-Wave forecasted that secular deflation was just around the corner, repeatedly, ever since 1932. It wasn't.

    Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    © 2009 Copyright Gary North - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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