Global Analysis

Cycles of History, Boom and Bust

by J. R. Nyquist

Weekly Column Published: 11.09.2007

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Many things are cyclical. That is to say, they occur again and again like clockwork, on the striking of an hour or the passage of a certain day. Winter recurs annually. The menstrual cycle corresponds to the phases of the moon. The life cycle of every living creature involves birth, growth, maturity, old age and death. On average, dogs live so many years and human beings live so many more. The cyclical course of nature itself is inescapable. Our clocks are based on the continuous motion of the earth as it rotates. Our calendars and seasons are based on the path of the earth around the sun. No wonder, then, it has been the tendency of political philosophy to describe politics and economics as cyclical, according to given seasons. The ancients saw a cycle of political revolutions emerging from the simple forms of the state. The moderns see a certain correspondence between the rise and fall of Rome and the rise and fall of America or “the West.” There is, as we all know, something called the “business cycle.” 

It has been claimed that history itself is cyclical. The German writer Oswald Spengler claimed that each civilization passes through definite stages. Such theories are not viewed today as scientific. Social phenomena are considered too complex for such analogies to be useful. But as there are small cycles, there must be larger cycles. How could there not be? Brilliant men and scholars have believed in regular economic “supercycles.” Joseph Schumpeter suggested the correctness of Kondratiev wave phenomenon (or “grand supercycles”) in which a disastrous economic downturn would follow every 50 to 60 years. 

As noted above, such theories are not “scientific,” but rely on the fact that all phenomena appear to follow a cyclical pattern – whether regular or irregular. 

Not adhering to the Kondratieff pattern, the United States did not suffer a second Great Depression in the 1980s. But still, there were those who believed the 1990s would see an economic downturn according to the Elliott Wave Principle. It was Robert Prechter, Jr. who believed in a wave pattern similar to that described by Nikolai Kondratiev. Curious as it may seem, Prechter was not an economist but a psychologist. He has repeatedly stated that mass psychology is the key to economics. 

While the Elliott Wave Principle is far from scientific, and anyone adhering to Prechter’s market predictions would have had a 15-year annualized return of negative 25.4 percent (according to the Hulbert Financial Digest), Prechter’s dark predictions of impending economic catastrophe possesses metaphorical elegance. As gold approaches $900 an ounce and oil approaches $100 a barrel, we are reminded that grand economic supercycles are very possible indeed. 

In 1995 Prechter predicted the coming of a debt-credit contraction. On page 278 of his book, At the Crest of the Tidal Wave, he wrote: “If there is one fundamental event that will result from a major bear market in social mood, it is the collapse in the bloated debt structure, a devastating event that not one citizen in ten thousand knows is coming. All this debt will have to be liquidated, and the process is unlikely to be serene.”

According to Prechter, the bursting of the credit bubble and the liquidation of debt would lead directly to deflation. “In the deflation of the 1930s,” noted Prechter, “stocks, real estate and commodities fell 90% in value, and questionable bonds fell 20% to 50%. Many stocks went to zero, and the companies were never heard from again.” The motor for the downward “spiral” of the economy, says Prechter, will be psychological. It will involve a shift from mass optimism to mass pessimism. “Booms last longer,” wrote Prechter, “because optimism is fed by slowly rising emotions involving hope and greed,which, because they are tempered by caution, can reach maximum intensity only over a long period….” Economic busts, however, can be sudden and fast-paced because “pessimism is fed by fast-flaming emotions such as fear and anger, which can be realized in a flash of destructive action.” 

According to Prechter, the final bust experienced by modern capitalism will the greatest of all. Prechter quotes the late A. Hamilton Bolton, who wrote: “In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by deflation of excess credit. This was the factor in common.” This observation puts things into perspective, as the United States has witnessed the greatest credit inflation in history and must now experience a corresponding credit deflation. As Prechter noted, “Major deflations are … extremely destructive, and the next one should be no exception. That we are in the midst (and apparently near the end) of the greatest debt buildup in world history suggests that the resulting deflation and depression will be correspondingly severe.” According to Prechter, it will be the greatest depression in over two centuries.

Even if Elliott Wave Theory is mistaken and unscientific, the cycle of boom and bust is real enough. It is not pessimistic to say that the United States will eventually experience another Great Depression. It is realistic to make such a statement. But are we currently approaching the decisive psychological turning-point between optimism and pessimism? If it doesn’t come at the end of 2007 it will come, nonetheless, in 2008 or 2009. The world economy cannot expand indefinitely. There will be another Great Depression. And this revelation has military-political significance for Americans. It has national-survival significance. 

When the economic situation changes, when peak oil has its say, when the Middle East crisis cannot be solved, when American politics reduces to a sharp ideological division, when the real estate bubble continues to burst, what will happen? What will the Russians and Chinese do? For thousands of years the world was about war and dominance, the power of oligarchies and the exploitation of peasants. Does anyone believe that the world cannot revert back? Does anyone think that the fall of modern capitalism will result in any other outcome? 

Well, of course, we are yet surrounded by militant optimists who insist that realism is pessimism. All the same, life and history follow certain cycles. This much is undeniable. 

Copyright © 2007 Jeffrey R. Nyquist
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