As a representation of how technological growth in an economy will create a 60year boom/bust cycle through over-investment and over-saturation of supply, the Kondratiev cycle is able to describe approximately 6 major periods of market movements as a function of innovation. By digging into how it is that these cycles of prosperity and poverty emerged in the past, we can then start to see an interesting trend of how it is that the theory applies to today’s markets, and how it is that we can understand a little bit more about where it is that we’re going into the future.
The first generally accepted occurrence of a Kondratiev cycle, as defined by both the inflation and interest rates of the time, is thought o have occurred between the 1780s and 1840s as a result of the emergence of mechanization in the cotton industry. Specifically, the development and implementation of machinery for the textile industry drove the majority of market movements that started off the industrial revolution.
However, by the end of the period, the over saturation trend began to draw down the markets, noted by the way in which more than 70% of production had to be exported from manufacturing companies, because of the inability of domestic demand to support the trend. The end result created the famous emergence of labor rights in countries in Britain, as a function of the collapsing markets.
Following the deleveraging of the cotton industry over a period of approximately 20 years (the later portion of the textile cycle), the emergence of the Railroad industry for the remainder of the 19th century created a particularly robust economic cycle. As steam-engine lines grow across Europe, they created the infrastructure that would be leveraged into further growth in later periods.
The end result was a situation where railway mileage was leveraged, dramatically expanded, and somewhat suddenly become abandoned as an investment opportunity. The particularly interesting aspect of this cycle to take note of is the way in which it arguably lasted as long as 100 years, making it the most robust growth periods in record. However, the end result was a situation where this cycle then also overlapped with the next one, resulting in a situation where multiple booms were stacked over each other.
After the railway boom, investors managed to again leverage the existing railway infrastructure they had in place to begin the ‘electrification’ of the US economy. This involved the laying of telegraph cables, and the build of roads to support the growth of the combustion engine for consumer applications (ie. ford automobiles in particular). This urban industrialization created growth in both the workforce, and overall economic output, resulting in an explosion in housing prices.
This housing price boom created an incentive for builders to begin over saturating the residential market with homes, and wound up brining total debt levels for both consumers and the government to as high as 260% of GDP in the earlier 1930s. By the end of this period, both the railway and electrical boom periods began to decline over the same period, and arguably contributed to the great depression. Hardcore Kondratiev promoters might go so far as to argue that the Great Depression was actually just the emergence of a double-deleveraging cycle (which would not be an accurate statement, as there was more to the Great Depression than just deleveraging).
During the Second World War, the petroleum industry became a major player in the global economy, as it supplied the European efforts of all ends of the conflict. As oil demand grew, and the technologies supporting the industry developed, industrial development grew for another 40 years as a function of the applications of the petroleum industry (ie. plastics, pharmaceuticals, and energy).
Combined with the way in which the usages of oil allowed for the development of technologies that could replace out-dated transportation (ie. diesel trains and combustion automobiles) this period is noted for being one of the most aggressive Kondratiev growth periods. From there, the decline in the 1970s is also noted as being particularly abrupt due to the global economy’s petroleum dependence. The total period would then continue to be a pervasive force even until today, as petroleum products remain a dominant influence of an economy’s ability to develop.
The last Kondratiev cycle to discuss arguably continues today, and for us represents the tail end of the influence of information technology as being the key driver of the economy since the 1980s. Between the over saturation of fiber-optic networks in population-dense areas, the replay of the housing boom/bust of the great depression (as a function of the electrical cycle discussed above), and the intense speculation that took place in financial and online equity placements, the era proved to be particularly dramatic in the way that it created an extremely dramatic cycle overall, as being subject to petroleum, technological, and financial innovations all stacking and collapsing together at once. The end result is our economy today, and the suggestion of where it is that we are going into the future.