Life doesn’t just persist in the same state. It changes constantly. Nature produces an immense variety of life. The forms best adapted for the conditions which exist survive and reproduce. The rest don’t. Entropy – the tendency of things to fall from order into disorder – is only defeated by life’s relentless effort, through DNA, to replicate itself in as many different survivable forms as possible.
–What does any of this have to do with Kondratieff and the share market?
–An economy is not a closed system, either. It does not behave in a linear way. That means you can’t really predict how it’s going to turn out. And importing a linear or cyclical theory into a complex adaptive system like the economy means you are going to be confounded in your understanding and your forecast. You will not predict what you can’t know. The unknown unknowns will get you every time.
–The key variables that we do know about in any economy – land, labour, energy, and innovation – are always changing and changing the way they interact and producing new possibilities (not always good, of course). For example the role of technology in the Kondratieff cycles is, as far as we know, unexplored. When Kondratieff wrote, the industrial revolution was increasing crop yields. Human population was on the verge on productivity explosion – both physically and economically.
–As people moved out of the country and into the city, labour and capital were freed up to harness the power of coal and oil to make entirely new systems of transportation and. It really was a new frontier in terms of productive possibilities. You went from cows and washing boards to refrigerated milk and milkshakes.
–By the way, these new frontiers (space, the final) always make some people nervous. These nervous people are the ones who could have the most to lose from a change in the status quo. Or, they could be genuinely and quite negatively affected by the change – the proverbial buggy whip maker watching a Model T roll down the street. Or they could be type of conservative person, psychologically and emotionally speaking, who reacts to a changing world by pining for the “old days” when things were more certain and didn’t change.
–This is why far right conservatives and the Greens will find they have more and more in common in coming years – both pine for a world that doesn’t change much. The traditional Right defines that world in moral and religious terms. The new Left defines it in environmental and resource terms. But both are essentially backward looking and want the State to interfere in private life to keep things as they were, or as they should be again.
–What the Kondratieff cycle may not accommodate is what you can never predict: the future. But at the risk of making a major ass of ourselves we’ll make a prediction: the current system has been fatally compromised by the world improvers and the backward lookers. Three hundred years of improvement in the general living conditions of man are at risk.
–The first major improvement in standards of living came with an increase in calories. When hunter gatherers became settled farmers, excess calories became a kind of credit humanity could spend on other things, like developing technology.
–With the development of industrial technology, powered by coal-fired steam engines, the next great leap came in the amount of time people had to spend growing food and the number of people required to grow it. Industrialisation meant fewer people had to be employed growing food. More could be employed making things. The variety of technology and durable and finished goods exploded in the 19th and 20th centuries.
–The further concentration of labour in cities made more and subtler variety possible, this time in the form of leisure and entertainment. You got the Jazz Age, Sinclair Lewis, George Bernard Shaw, the Charleston, and the Blitzkrieg.
–But then – and we think it started to happen in about 1914 but really picked up pace in the 1970s – we hit the limits of the frontier of this previously stable system. With the advantage of creating money from nothing – fiat money and fractional reserve lending – a huge global credit boom accelerated the use and abuse of scarce real resources (land, labour, and capital). It also accelerated the use of energy.
–More importantly, an already-complex system produced by a few simples rules – private property, sound money, low taxes, and free trade, the rule of law – became even more complex and fragile and stagnant as those rules were tinkered with to produce designed outcomes cherished by the political class.
–Here we are today. Our prediction is that that great complexity and prosperity produced by the 19th and early 20th century is being destroyed by the tinkering and the tinkerers. They have created something that cannot sustain itself – a model of asset-based private and corporate wealth creation that is not based on sound money or honest work or the rule of law (the corporations and the financiers and the politicians make the law to protect their interests now).
–Nature punishes the inefficient and destroys the wasteful. And so do markets, when we let them. We take the amount of surplus in the world – calories, time, leisure – for granted. In fact, we even begin to call it a right.
–What we forget is that all those calories and all that time and all that leisure were the by-products of a system based on simple rules. With those rules being broken, twisted, and disfigured to meet other ends, we shouldn’t expect the system to produce the same kind of surplus we are used to. And now we see, it’s not.
–Of course without all the theory most people know intuitively that things aren’t working anymore. That’s because most people have already begun to adapt to a world where big institutions have trouble delivering on promises they’ve made and where the rules constantly change. Some people prefer not to think about this and would rather eat Cheesy Puffs instead. Woe unto them!
–What we think the Kondratieff cycle doesn’t show is that the history of the natural world is punctuated by extinction events – events which so radically changed the landscape or the habitat that most species didn’t survive. And in the financial world?
–We have seen a series of minor extinction events in the finacial world beginning with the Mexican devaluation in 1995. The Asian Tigers, Russia, LTCM, the tech bubble, and then Bear Stearns, Lehman, Greece and beyond. And beyond?
–All of these financial events are steadily concentrating risk in a smaller and smaller number of assets into which a greater and greater number of people are congregating: namely bonds and especially U.S. bonds. This concentration is made of refugees from other bubbles that have faith that central bankers can keep a few bubbles going.
–But oh ye of little faith, ye reckoners, what do you reckon? Will the counterfeiters running the world’s central banks pull of the greatest confidence trick of all time that you can create wealth by printing money and solve a debt problem with more debt? Or will they fail?
–They’ll probably fail. Will it be before September 7th? Will it be in a few years? Stay tuned. And in the meantime, adapt or perish!
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Dan Denning: Dan Denning is the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.