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What is the Kondratieff wave? 


Nikolai Kontratieff (1892-1938) was a Russian who came up with an observation that capitalist economies go through cycles that consist of four phases – growth, stagnation, disinflation (the plateau phase), and then depression.  The entire cycle lasts several decades.  I have seen it postulated that the cycle is related to the span of a human lifetime – which may explain why the cycle seems to be longer these days (it was originally estimated to be about 50 years long – it seems that it can go up to about 80 years, at least in modern times). 


The four phases are –


1.  Growth – the initial growth period coming out of the previous depression.  

2.  Stagnation – the growth reaches a point where it is not sustainable anymore and inflation gets out of hand.

3.  Disinflation – the inflation is wrung back out of the system (often by way of a recession) and then there is a period of declining inflation with lower real economic growth than during the Growth phase.  This is the period during which financial markets go way up – leaving the people with a feeling of great prosperity even though actual growth is lower than during the Growth phase and the people are not actually as much better of as they feel they are.  That is why it is also referred to as the plateau phase. 

4.  Depression – Circumstances in the Disinflation phase finally reach the point where the financial markets can’t keep going up anymore, so they start going down in a big way, and the Disinflation also finally reaches a point where it tips into deflation.  Also, commodity prices, which peak at the end of the Stagnation phase and then decline again during the Disinflation phase, start going up again in a big way, which helps tip the economy into a downturn. 


The previous Kondratieff cycle ended in the late 1940’s.  In the current one, the growth phase lasted from the late 1940’s until about 1966, the stagnation phase lasted from about 1966 until 1982, the disinflation (i.e., plateau) phase lasted from 1982 until 2000, and the depression phase of the current cycle started in 2000. 


So why have we not ended up in a depression yet? 


Probably in response to the recession of the early 1970’s, a law (called Humphrey-Hawkins) was passed by Congress in 1978 that stipulates low inflation at full employment (in other words, in effect, a law against recessions).  The law tasked the Federal Reserve (the Fed) with ensuring that another recession (and by extension, another depression) would not happen again.  In the late 1970's, essentially as soon as the law was passed, inflation took off, so the Fed had to deal with that first - and when that had been accomplished by way of a bad recession in the early 1980's, the Fed went back to fighting recessions.  (Actually, the downturn would have happened anyway – see item 3, Disinflation, above – but common lore has it that the Fed engendered the recession of the early 1980’s to wring the inflation out of the system; actually, all the Fed did was to play along with what would have happened anyway.)  From the early 1980's onward, the Fed focused on full employment (since consumer price inflation was falling – that was the beginning of the disinflation phase).